CIHM 
Microfiche 
Series 
(IVIonographs) 


ICMH 

Collection  de 
microfiches 
(monographies) 


Canadian  Institute  for  Historical  Microredroductions/lnstitut  Canadian  de  microreproductions  historiques 


Technical  and  Bibliographic  Notes  /  Notes  techniques  et  bibliographiques 


The  Institute  has  attempted  to  obtain  the  best  original 
copy  available  lor  filming.  Features  of  this  copy  which 
may  be  bibiiographically  unique,  which  may  alter  any  of 
the  images  in  the  reproduction,  or  which  may 
significantly  change  the  usual  method  of  filming  are 
checked  below. 

0   Coloured  covers  / 
Couverture  de  couleur 

□   Covers  damaged  / 
Couverture  endommag^e 

□   Covers  restored  and/or  laminated  / 
Couverture  restaur^e  et/ou  pelliculde 

I      I   Cover  title  missing  /  Le  titre  de  couverture  manque 

I I   Colored  maps  /  Cartes  g6ographiques  en  couleur 


D 


Coloured  ink  (i.e.  other  than  blue  or  black)  / 
Encre  de  couleur  (i.e.  autre  que  bleue  ou  noire) 


I      I   Coloured  plates  and/or  illustrations  / 


D 

D 
D 


D 


D 


Planches  et/ou  illustrations  en  couleur 

Bound  with  other  material  / 
Relid  avec  d'autres  documenf^ 

Only  edition  available  / 
Seule  Edition  disponible 

Tight  binding  may  cause  shadows  or  distortion  along 
interior  margin  /  La  reliure  serr^e  peut  causer  de 
I'ombre  ou  de  la  distorsion  le  long  de  la  marge 
int^rieure. 

Blank  leaves  added  during  restorations  may  appear 
within  the  text.  Whenever  possible,  these  have  been 
omitted  from  filming  /  II  se  peut  que  certaines  pages 
blanches  ajout^es  lors  d'une  restauration 
apparaissent  dans  le  texte,  mais,  lorsque  cela  6tait 
possible,  ces  pages  n'ont  pas  6\6  film^es, 

Additional  comments  / 
Commentaires  suppl^mentaires: 


L'Institut  a  microfilm^  le  meilleur  exemplaire  qu'il  lui  a 
§t^  possible  de  se  procurer.  Les  details  de  cet  exem- 
plaire qui  sont  peut-dtre  uniques  du  point  de  vue  bibli- 
ographique,  qui  peuvent  modifier  une  image  rcproduite, 
ou  qui  peuvent  exiger  une  modification  dans  la  m^tho- 
de  normale  de  filmage  sont  indiqu^s  ci-dessous. 

I      I  Coloured  pages  /  Pages  de  couleur 

Pages  damaged  /  Pages  endommag6es 


D 


Pages  restored  and/or  laminated  / 
Pages  restaur^es  et/ou  pellicul^es 


Q  Pages  discoloured,  stained  or  foxed  / 
Pages  dteolor^es,  tachet^es  ou  piqu^es 

I      I   Pages  detached  /  Pages  d6tach6es 

\y\   Showthrough / Transparence 

I      I   Quality  of  print  varies  / 


n 


n 


Quality  in^gale  de  I'impression 

Includes  supplementary  material  / 
Comprend  du  materiel  suppl^mentaire 

Pages  wholly  or  partially  obscured  by  errata  slips, 
tissues,  etc.,  have  been  refilmed  to  ensure  the  best 
possible  image  /  Les  pages  totalement  ou 
partiellement  obscurcies  par  un  feuillet  d'errata,  une 
pelure,  etc.,  ont  6\6  film^es  k  nouveau  de  fa^on  i 
obtenir  la  meilleure  image  possible. 

Opposing  pages  with  varying  colouration  or 
discolourations  are  filmed  twice  to  ensure  the  best 
possible  image  /  Les  pages  s'opposant  ayant  des 
colorations  variables  ou  des  decolorations  sont 
film^es  deux  fois  afin  d'obtenir  la  meilleure  image 
possible. 


This  Ittm  la  fllmtd  at  tha  raduction  ratio  chackad  balow  / 

Ca  documant  aal  film*  au  taux  da  rMuctlon  lndiqu4  ci-daitout. 


lOx 

14x 

18x 

22x 

26x 

30x 

1 

1 

' 

12x 


16x 


20x 


24x 


28x 


32x 


The  copy  filmed  hare  has  baan  raproducad  thanks 
to  tha  ganarosJty  of: 

National   Library  of  Canada 


L'axemplaira  fi\mi  fut  raproduit  graca  h  la 
gAnArosit4  da: 

Bibliotheque  nationale  du  Canada 


Tha  images  appearing  here  are  tha  bast  quality 
possible  considering  the  condition  and  legibility 
of  the  original  copy  and  in  keeping  with  the 
filming  contract  specifications. 


Original  copies  in  printed  paper  covers  are  filmed 
beginning  with  tha  front  cover  and  ending  on 
the  last  page  with  a  printed  or  illustrated  imprea* 
sion,  or  the  back  cover  when  appropriate.  All 
other  original  copies  are  filmed  beginning  on  the 
first  page  with  a  printed  or  illustrated  impres- 
sion, and  ending  on  the  last  page  with  a  printed 
or  illustrated  impression. 


The  last  recorded  frame  on  each  microfiche 
shell  contain  tha  symbol  — ^  (meening  "CON- 
TINUED"), or  the  symbol  V  (meaning  "END"), 
whichever  applies. 

Maps,  plates,  charts,  etc.,  may  be  filmed  at 
different  reduction  ratios.  Those  too  large  to  be 
entirely  included  in  one  exposure  ar9  filmed 
beginning  in  the  upper  left  hand  corner,  left  to 
right  and  top  to  bottom,  as  many  frames  as 
required.  The  following  diagrams  illustrate  the 
method: 


Las  images  suivantas  ont  iti  reproduites  avec  la 
plus  grand  soin,  compta  tanu  da  la  condition  et 
de  la  nattetA  da  l'axemplaira  film*,  at  9n 
conformity  avec  les  conditions  du  contrat  da 
filmage. 

Les  exemplaires  originsux  dont  la  couvartura  en 
papier  est  imprim«e  sent  film«s  en  commenpant 
par  la  premier  plat  at  an  tarminant  soit  par  la 
derniira  page  qui  comporte  une  empreinta 
d'imprassion  ou  d'illustration,  soit  par  la  second 
plat,  salon  la  cas.  Tous  les  autres  exemplaires 
origiriaux  sont  film*s  en  commenpant  par  la 
pramiire  page  qui  comporte  une  empreinte 
d'impression  ou  d'illustration  et  en  terminant  par 
la  darniire  page  qui  comporte  une  telle 
empreinte. 

Un  des  symboles  suivants  apparaitra  sur  la 
derniAre  image  de  cheque  microfiche,  selon  le 
cas:  le  symbols  — »  signifie  "A  SUIVRE".  le 
symbole  V  signifie  "FIN  ". 

Les  cartes,  plenches,  tableaux,  etc.,  peuvent  etre 
filmis  i  des  taux  da  reduction  diffirents. 
Lorsque  le  document  est  trop  grand  pour  Atre 
reproduit  en  un  seul  clich*,  il  est  film*  i  partir 
de  I'angia  supArieur  gauche,  de  gauche  i  droite, 
et  de  haut  en  bas,  an  prenant  le  nombre 
d'imagas  nicessaire.  Les  diagrammes  suivants 
illustrent  la  m^thode. 


1 

2 

3 

1 

2 

3 

4 

5 

6 

MICROCOPY    RtSOlUTION   TEST   CHART 

ANSI  and  ISO  TEST  CHART  No    2 


LO 

IL 

1.25 


113  2 


12.5 


1~ 


M 

m   12.0 


.8 


14     IIIIII.6 


^       APPLIED    ItVMGE       Inc: 


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Carnegie  Endowment  to  International  Pea^ 


DIVISION   Of   ECONOMICS   AND   HISTORY 


PRELIMINARY  ECONOMIC    STUDIES   OF  THE   WAR 


EFFECTS  OF  THE  WAR  ON  MONEY, 
CREDIT  AND  BANKING 


^lif 


■«  k 


Carnegie  Endowment  for  International  Peace 


DIVISION  OF  ECONOMICS  AND  HISTORY 

JOHN   BATES  CLARK,  DIRECTOR 


PRELIMINARY  ECONOMIC  STUDIES  OF  THE  WAR 


EDITED  BY 
DAVID    KINLEY 

Pcofoior  of  Political  Economy   Univeriity  of  Illinois 
Member  of  Commiltee  of  Re«e«rch  ol  the  Endowment 

No      15 


EFFECTS  OF  THE    WAR   ON   MONEY, 

CREDIT   AND    BANKING   IN    FRANCE 

AND  THE  UNITED  STATES 


BY 


B.    M.  ANDERSON.  Jr..  Ph.D. 


NEW  YORK 

OXFORD  UNIVERSITY  PRESS 

AMERICAN  n'lANCH:  35  Wht  ^2hd  St»iit 
LONDON.  TORONTO.  MELBOURNE.  AND  BOMBAY 

1919 


BV    THE 

CARNEGIE    EN'DOWMENT   FOR   INTERNATIONAL  PEACE 

2    jACKSflN    PLACt,    U'AsnisCTOS.    D     C 


EDITOR'S  PREFACE 


Professor  Anderson's  study  of  "  Effects  of  the  War  on  Money, 
Credit  and  Banking  in  France  and  the  United  States  "  needs  no 
commendation.  It  is  full  both  of  informati(jn  and  of  suggestions, 
md  will  be  valuable  not  only  to  bankers  but  to  other  business 
men,  lu  students,  and  to  the  general  reader. 

The  account  of  (Kcuirences  and  policies  in  the  United  States 
is  so  full,  accurate  and  clear  that  editorial  comment  on  them  is 
unnecessary.  Certain  matters  stand  out  in  the  confused  history 
of  the  early  days  of  the  war  which  should  be  guiding  posts  for 
the  future.  For  he  would  have  been  held  a  foolish  prophet  who, 
before  the  war,  would  have  predicted  that  the  economic  structure 
of  the  world  would  have  withstood  as  well  as  it  actually  did  the 
shock  of  the  military  cataclysm.  The  closing  of  the  stock  ex- 
changes, the  moratoria,  the  strength  and  wise  action  of  central 
Ijanks  and  the  provision  of  emergency  currency,  are  the  great 
master  strokes  of  policy  that  kept  the  economic  "  ship  of  state  " 
from  shipwreck. 

The  history  of  the  action  of  the  French  ])anks  will  be.  in  the 
main,  new  to  most  American  readers.  The  policy  showed  in  many 
ways  the  shortsightedness  that  characterized  our  own  banking 
policy  in  times  of  stress  before  the  establishmert  of  the  federal 
reserve  system.  Cooperation  among  the  private  banks  of  France 
seems  to  have  been  difficult  and  a  generous  public  policy  un- 
thought  of.  To  be  sure,  the  conditions  of  French  life  have  made 
France  a  capital  lending  and  an  agricultural  country,  rather  than 
an  industri?;  one.  It  may  well  be  that  those  responsible  for  the 
conduct  ot  the  French  private  banks  thought  it  their  first  duty 
to  conserve  these  classes  of  interests,  not  being  able  to  see  far 
enough  ahead  to  know  that  neglect  to  support  their  government 
strongly  would  inevitably  be  the  ruin  even  of  those  interests. 

The  advantages  of  our  own  new  system,  the  federal  reserve 
system,  have  been  brought  prominently  to  notice.     For  the  first 


IV 


EDITOR  S    PREFACE 


time  in  nnr  histnr-  we  have  had  an  (>r;,^aiiizatiiin  powerful  cnou-jh 
t'p  mntnil  the  .listiirhiiif,'  factors  of  the  credit  situation.  The 
war  leaves  us  the  stronj^'est  country  in  the  world  in  the  tuatter 
of  .t,'  11  hnldinijjs  and  in  the  extension  of  our  creiht.  Neverthe- 
less, we  nni-t  not  draw  too  optimistic  conchisions  as  to  our  mone- 
tarv  streni^th  from  these  facts.  We  -hall  have  to  work  hard  to 
retain  the  advanta.ire.s  which  these  two  conditions  jjive  us. 

I   rini   i,dad  that  the  suliject  of  this  study  has  heeii   in   such 
!iia>terly  hands  as  those  of  Dr.  Anderson. 

David  Kinley. 

IViana.  Illinois, 

Fcbmarv  19,  1919. 


FOREWORD 


A  four  year  period  in  the  history  of  money,  credit  and 
banking  in  France  and  the  United  States  might  ordinarily  be 
covered  satisfactorily  in  a  slena^r  essay,  easily  written  in  a  short 
time.  Almost  every  week  of  the  war  period,  however,  has 
brought  events  of  the  first  magnitude  in  both  countries.  A 
definitive  history  of  money,  credit  and  banking  during  this 
period  must  be  the  work  of  several  years.  There  is  not  merely 
the  problem  of  reading  and  digesting  an  immense  mass  of 
materials,  but  there  is  also  the  certainty  that  many  episodes, 
carefully  disguised  for  political  and  military  reasons,  can  not 
be  justly  evaluated  until  a  later  time.  The  writer  trusts  that 
other  students  will  bear  these  difficulties  in  mind  in  passing 
judgment  on  the  book.  Errors  it  must  contain,  both  in  state- 
ments of  fact  and  in  interpretations. 

It  is  a  pleasure  to  acknowledge  various  obligations  to  others. 
Mr.  Harvey  E.  Fisk  of  the  Bankers  Trust  Company  of  New 
York  kindly  supplied  several  of  the  charts,  as  did  Dr.  M.  Jacob- 
son,  statistician  of  the  Federal  Reserve  Board.  Both  gendemen 
have  given  advice  and  information.  The  United  States  Bureau 
of  Eabor  Statistics,  the  Service  Department  of  the  National 
Bank  of  Commerce  in  Nevv'  York,  the  New  York  Times  Annalist, 
the  library  of  the  Carnegie  Endowment  tor  International  Peace 
at  \V\'ishington  and  other  organizations  have  been  very  generous. 
The  author  is  indeljted  for  many  ideas  to  his  colleagues  of  the 
Committee  of  the  .Xmerican  Economic  .Association  on  the  Pur- 
chasing Power  of  Money  with  Reference  to  the  War,  Professors 
Irving  Fisher,  \V.  C.  Mitchell.  E.  W.  Kemmerer  and  \V.  M. 
Persons  and  Dr.  Royal  Meeker.  Mr.  Basil  P.  P.lackett,  financial 
re])resentative  of  the  British  Government,  has  given  information 
and  advice,  as  have  Profes.sors  O.  M.  W.  Sprague  and  11.  P. 
Willis.  It  is,  perhaps,  unnecessary  to  say  that  the  writer  alone 
is  responsible  for  the  views  here  e.xpres.sed. 

B.    M.    A.NDERSON,   Jr. 

November.  1918. 


CONTENTS 

CHAPTER  PACE 

I  Introduction    3 

Part  I — France 

II  Money.  Credit  and  Banking  in  France 19 

III  The  Outbreak  of  the  War  in  F'rance 43 

I\'         Depression  and  "  Reprise  des  Affaires  " 56 

V          Prices  of  Commodities  in  France  during  the  War  71 
\'I         The  Effects  of  the  War  on  the  Medium  of  Ex- 
change in  France :  Coin,  Bank  Xotes  and  Checks  82 

VII       French  Fiscal  Methods  during  the  War 03 

\'III      The  Banque  de  France  during  the  War 105 

IX  Private  Banks  and  Savings  Banks  in  France  during 

the  War 114 

X  The  Moratorium  in  France 122 

XI  The  French  Bourse  during  the  War 127 

XII  French  Foreign  Trade  and  Foreign  Exchange  .  .  .  133 

Part  II — The  United  States 

XIII  New  York  at  the  Outbreak  of  the  War 143 

XI V  Gokl,  Foreign  Trade  and  Foreign  Exchange 1.13 

XV  The  I-'ederal  Reserve  System  during  the  War  ....  l<i.') 

X\T      Public  Finance  and  Bank  Credit 17i> 

XVII    Prices  in  the  United  States 1!»0 

Appendix     211 

Index  221 


vil 


EFFECTS  OF  THE  WAR  ON  MONEY, 

CREDIT  AND  BANKING  IN  FRANCE 

AND  THE  UNITED  STATES 


CHAPTER  I 
Introduction 

In  its  details,  the  effect  of  the  war  upon  money,  credit  and 
banking  is  l)e\vilderinj^ly  complex.  It  is.  therefore,  necessary  at 
the  outset  to  sketch  in  broad  outline  certain  of  the  main  move- 
ments and  tendencies  as  a  skeleton  abcnU  which  some  of  the 
details  may  be  jjrouped.  This  outline  is,  in  fact,  fairly  simple 
and  the  writer  is  content  to  present  it  in  a  form  even  simpler 
than  the  facts  will  warratit  as  a  first  approximation  in  the  study 
of  a  complex  body  of  details. 

We  must  view  the  effects  of  the  war  first  on  their  physical 
side :  what  has  the  war  brought  about  in  production  and  con- 
sumption, in  the  course  of  manufactures,  shipping,  agriculture 
and  mining?  The  first  step  taken  at  the  outbreak  of  the  war 
was.  of  cour.se.  the  mobilization  of  the  armies.  Throughout 
I'rance.  (Jermany.  .Austria.  Russia.  Serbia  and  Helgium,  the 
outbreak  of  the  war  led  millions  of  laborers  to  drop  their  tools 
and  go  to  the  front.  Production  was  thus  instantly  enormously 
curtailed.  At  the  same  moment,  there  l)egan  an  incredible  in- 
crease in  consumption,  as  these  millions  of  men  not  only  con- 
sumed more  food  and  wore  out  more  clothing  than  in  ordinary 
times,  but  also  devoted  themselves  to  the  most  wasteful  kinil  of 
destruction  of  the  products  of  lal)or  in  the  form  of  explosives, 
costly  machines  of  war  and  the  like.  The  consumption  of  the 
governments  and  the  armies  increased  much  more  rapidly  than 
civilian  consumption  could  contract,  and  the  reservoirs  of  sup- 
plies existing  in  the  belligerent  countries  were  rapidly  ilimini.shed. 

In  ordinary  times  the  world  lives  from  hand  to  mouth.  With 
all  our  accumulation  of  wealth  we  are  never  far  rem<ived  from 
famine  or  from  shortages  of  consum|)tion  goods.  The  stored 
up  wealth  of  the  worM,  railroads  and  bridges,  buildings,  fac- 
tories, machinery,   farm  improvetnents,  household   furnishings, 


4  EFFECTS  OF   THE  WAR   OX    MONEY,   CREIHT   AND   BANKING 

museums  and  art  galleries,  and  the  like,  arc  not  available  for 
direct  consrjrption,  and  with  the  stoppage  of  the  current  flow 
of  goods  from  farms  and  factories,  fisheries  and  mines  the 
world  is  speedily  placed  on  short  rations.  It  was,  therefore 
vitally  necessary  that  new  supplies  should  he  secured  promptly  by 
the  helligerem  powers,  and  for  this  there  were  several  source^ 

The  matter  was  accomplished  most  simply  in  (iennanv.  which 
was  early  blockaded  and  unable  to  draw  in  verv  nui'-h  from  the 
outsule  w.^rld.     There  were  labor  reserves,  old  men.  women  and 
children,  and  tor  the  labor  that  was  n.n  mobilized  there  was  the 
possibility  (,f  ..vertime  u-,.rk.     This  res.nirce  was  not  the  first 
m  France,  but.  none  the  less,  in  France  by  November.  1!»17.  with 
-M  i)er  cent  of  the  iiumial  labor  force  mol)ili..cd  in  the  army 
there  was  !»s  per  cent  of  the  normal  labor  supplv  at  work— which 
meant  a  heavy  <lraft  on  the  women,  children  and  old  men,  and 
also  a  .Iraft  on  colonial  and  foreign  labor  brought  int.^  France 
France  and    Fn.t^land   commanded    the    seas,   and   their   first 
resource  for  tlie  immediate  increase  in  the  volume  of  goods  aVid 
supplies  re.|uire.l  Ur  the  war  was  in  neutral  countries    notably 
the  Lmted  States.     The  one  big  outstanding  fact  in  the  course 
of  international  tra.le  during  the  war  has  been  the  gigantic  in- 
crease m  American  exp.,rts  to  l-nglan.l.  France  and  others  of 
the    F.ntente    Allies-an    increase    of    exports    not  met    by    an 
mcrease  ol  imports  and  constituting  conscquentlv  a  net  a.hlition 
to  the  physical  resources  of  the  Entente.     This  addition  to  the 
power   ot    the   countries   oppose.l    to   Gemianv    was   no   doubt 
crucial  in  saving  them  from  defeat. 

To  a  much  less  extent,  iRutr.d  res.nirces  of  goods  and  sup- 
plies were  available  tor  (iermaiiy.  Cermanv  has  drawn  on  the 
Netherlands.  .Switzerland,  Xorwav.  .Sweden  an.l  JVnmark-to 
some  extent  ,.n  Italv  and  Roumania  in  the  ,..-,rlv  period  of  the 
war— and  on  some  ,.ther  cMintrics.  Some  s-,pph"es  fr,  m  \merica 
went,  in  the  early  part  .,f  the  war.  to  Cermanv,  bv  means  of 
transshipments  fhroui^r],  ,!„>  XctherlaiKls.  Sweden  and  other  ner- 
tral  markets.  This,  however,  has  been  exaggerated  on  the 
b.-.Ms  ,,t  the  figures  f-T  imports  from  the  Tnited  States  of  certain 
neutral  countries,   lu.tably   the   Scandinavian   countries       It   is 


INTRODL'CTrON  5 

worth  while  to  point  out  that  iii  the  ordinary  course  of  trade 
liefore  the  war  a  considerable  volume  of  American  fjoods  was 
sent  first  to  the  Free  T^rt  of  Hamburg  and  subsequently  trans- 
shipi)ed  to  the  Scandinavian  countries.  When  Hamburg  was 
blockaded,  these  goods  were  shipped  directly  to  the  coimtries  of 
liieir  •'iltimalc  destination,  thereby  swelling  the  import  figures 
of  these  countries  from  the  United  Sntes,  hut  not  proportion- 
ately increasing  their  actual  imports  frnm  the  United  States.  T(j 
a  very  large  degree,  the  Central  I'-wers  have  been  sel f-suiilicing 
during  the  whole  course  of  the  war. 

\'iewing  the  matter  in  physical  terms,  therefore,  it  is  fairly 
easy  to  see  the  main  transformations  that  the  war  has  brought 
about  in  indu.stry  and  trade.  On  the  side  of  money,  credit, 
banking  and  finance,  the  outlines  are  not  .so  clear  and  easily 
drawn.  The  first  effect  of  all  of  the  outbreak  of  the  great  war 
—indeed  an  effect  that  manifested  itself  with  the  mere  prospect 
of  war — was  a  greatly  increased  significance  attached  to  a  spe- 
cial function  of  money,  namely,  money  as  a  "  bearer  of  options  " 
and  as  a  "  .>tore  of  value."  In  tranquil  times,  men  are  often 
content  to  keep  their  wealth  in  nonliquid  forms.  Men  can  -nake 
long  run  plans  and  long  time  investments,  and  are  often  glad  to 
get  such  investments  which  combine  high  yielil  with  slight 
li(|uidity.  But  when  danger,  uncertainty  and  emergencies  come, 
men  prefer  gold  to  real  estate.  The  eu'ort  is  made,  even  at  the 
price  of  a  heavy  .sacrifice,  to  accumulate  econo'^iic  resources  in 
form  'Suitable  for  inmiediate  use.  Xot  knowing  which  way  to 
turn,  men  seek  to  prepare  themselves  to  turn  in  any  way  that 
the  future  may  indicate  to  be  most  advantageous.  The  effort 
to  sell  real  estate  or  other  absolutely  fi.xed  forms  of  investment 
at  the  outlireak  (jf  the  war  was  futile.  There  were  no  buyers. 
Ihit  it  was  possible,  to  a  very  considerable  extent,  to  turn  securi- 
ties (juoted  in  the  great  stock  exchanges  into  cash  in  the  form 
of  Uank  deposits  or  !»ank  notes,  and  it  was  possible,  to  a  con- 
siderable extent,  to  turn  hank  notes  and  bank  deposits  into  gold; 
and  the  first  indications  of  coming  war  manifest  themselves  in 
these  two  operations. 

The  effort  to  turn  bank  credits  into  gold  manifested  itself 


6  EFrEcrs  of  the  war  on  money,  credit  and  banking 

first  as  German  hankers,  as  early  as  Htl2.  began  to  take  steps 
to  increase  tlieir  gold  sui)i)ly.  In  order  to  take  gold  out  of  the 
hands  of  the  jK-ople  and  carry  it  to  the  reserves  of  the  Keichs- 
bank,  fifty  and  twenty  mark  hank  notes  were  issued  to  take  the 
place  of  the  gold  in  circulation,  (.icrinan  agents  regularly  ap- 
peared as  bidders  for  gold  at  the  London  auction  rooms.  Gold 
was  siiipped  from  the  L'nited  States  to  Germany,  and  the  famous 
Spandau  treasure  was  transferretl  to  the  vaults  of  the  Reichs- 
bank.  By  l:M4.  (ierinany  ceased  to  take  much  gold,  having  pre- 
sumably decided  that  her  resources  were  adequate.' 

I'rance  and  Russia  made  strong  efforts  to  increase  their  gold 
reserves  during  the  .spring  and  summer  of  lit  14.  In  eighteen 
niontlis  preceding  the  outbreak  of  the  war.  the  gold  holdings  of 
the  central  banks  oi  Germany,  I-Vance  and  Russia  were  estimated 

to  have  increased  l)y  .^rjc.o.ooo, >.     This  drift  of  gold  to  these 

great  central  reservoirs  led  to  a  tightening  of  the  money  markets 
of  the  rest  of  the  world,  and  led  to  an  unusually  large  drain  on 
the  gold  supply  of  the  L'nited  States. 

So  far  the  movement  was  silent  and  unaccompanied  by  excite- 
ment. It  increased  tiie  tendency  to  gloom  and  depression  which 
most  of  the  financial  centers  of  the  world  felt  in  any  case,  but 
It  was  skilfully  managed  and  did  not  occasion  great  alarm.  Fol- 
lowing the  assassination  at  Sarajevo  on  June  l>S,  lit  14.  however, 
and  the  alarms  that  followed,  the  efifort  to  convert  securities  into 
bank  credit  began  to  assume  great  proportions.  Starting  with 
heavy  selling  on  the  bourse  of  \"ienna.  with  a  fall  in  the  prices 
of  stocks  of  from  lo  to  !:.>  per  cent  on  July  1:5,  it  spread  rapidly 
to^  liie  other  great  markets,  culminating  in  panics  in  the  bourses 
ot  X'ienna,  I'.erlin.  Paris  and  other  continental  centers  and  forc- 
ing them  t(i  suspend  operations.  The  selling  spread  to  London 
and  .\ew  \'ork.  and.  by  the  time  war  became  certain,  all  Europe 
was  selling  in  Xew  ^'ork,  witiiout  limit  of  price,  such  securities 
as  it  held  as  were  listed  in  tlie  Xew  ^'ork  market.  Kurope,  par- 
ticularlv  Great  Britain,  iiad  invcMed  heavily  in  American  securi- 

'  r.onrllr.ip,  F  \V  :  '■  .''omr  F.c.non.ic  F.rfixts  ,,f  Uir  Fnmpcnn  W.ir  on  t\w 
I  nitfd  Mati-i.  Journal  of  the  .Unciirnn  Hanker/  .Iswaaliou  May  1910 
p.yrp  in,^4:   r,vR.it:  "  .Americaii   Finance  in  tfie  War  TfiiMie-;!,"  Review  of 


IN'TRODL'CTION 


ties,  and  the  efforts  to  realize  upon  these  investinents  finally 
forced  even  far  away  New  York  to  close  its  stock  exchange  on 
July  31.  a  few  hours  after  the  London  stock  exchange  closed. 

In  connection  with  this  effort  to  get  wealth  into  the  most 
liquid  jM)ssii)le  form,  there  manifested  itself  promptly  in  the  con- 
tinental countries  a  strong  preference  for  gold  as  compared  with 
bank  notes  or  ijank  credit,  a  preference  reflecting  distrust  of  the 
paper  money,  and  reflecting  a  general  belief  that  the  central  banks 
would  not  preserve  the  convertibility  of  their  notes  into  gold, 
fiold  quickly  disappeared  from  circulation;  central  banks 
quickly  suspended  gold  redemption;  and  continental  Europe 
went  promptly  to  a  paper  money  basis.  The  preference  for 
"  hard  money  "  over  paper  even  extended  to  the  silver  coin, 
whose  bullion  value  was  less  than  the  value  of  the  bank  notes 
which  the  people  distrusted.  This  preference  for  "  hard  money  " 
lias  even  extended  at  times,  particularly  on  the  part  of  peasants, 
to  copper,  so  that  copper  coins  have  been  hoarded  where  bank 
notes  have  been  paid  out.  We  shall  later  discuss  this  phe- 
nomenon in  detail  in  connection  with  the  medium  of  exchange 
in  France. 

The  strong  preference  for  wealth  in  liquid  form  is  in  itself  an 
evidence  of  a  demoralization  of  credit,  but  there  were  inevitable 
factors  which  would  have  demoralized  the  credit  fabric  even  in 
the  absence  of  this  dramatic  psychological  change.  At  the  out- 
break of  war,  with  belligerent  cruisers  seeking  to  capture  the 
merchaiu  ships  of  their  enemies,  ocean  trade  was  suddenly  inter- 
rupted. The  shipments  of  gold  from  one  country  to  another  be- 
came impossible.  The  shipment  of  goods  from  one  country  to 
another  became  impossible.  Unable  to  ship  either  gold  or  goods, 
unable  to  sell  securities  because  the  .stock  exchanges  were  closed, 
unable  to  Ijorrow  at  ft)reign  banks  because  of  the  uncertainties 
of  the  credit  situation  and  because  of  the  weakness  of  many 
banks,  men  in  one  country  who  had  bought  goods  from  another 
country  and  who  had  payments  to  make  in  that  other  country, 
were  unable  to  meet  their  obligations.  This  situation  centered 
in  London,  which,  by  long  standing  custom,  is  the  center  for 
making  international  payments.    The  whole  world  was  indebted 


•S  KKKliCTS  (.F  THE   WAR  ON    MONEY,    CREDIT   AND   BANKING 

t.)  Loiul.Mi  aiul  the  world  was  unable  to  meet  its  del)ts.  London 
mstmit.ons.  unable  to  collect  from  their  various  debtors  were 
smnlarly  unable  to  p-iy  their  creditors.  The  credit  situation  was 
necessarily  demoralized.  The  .leclaration  of  war.  moreover  at 
once  made  it  unpossible  that  creditors  in  England  could  collect 
trom  debtors  in  (k-rmany  or  rvn-  xrrsa. 

The  credit  system  is  dependent  upon  a  steady  tlow  of  funds 
from  <lel)tor  t<.  creditor.  Each  business  man  in  general  is  both 
<lebtor  and  cre.litor:  funds  starling  from  an  ultimate  consumer 
may  go  through  many  hands,  canceling  manv  debts  in  the  process 
An  interruption  anywhere  in  this  chain  of  pavments  may  de- 
moralize the  credit  system. 

There  was  furtlier  (he  collapse  of  security  values  and  the 
inability  ot  tim.e  who  had  bornnved  at  the  banks  on  stock  and 
bond  cllateral  security,  often  on  call,  to  pay  their  obligations  at 
the  lianks.  The  volume  of  such  stock  and  bond  collateral  loans 
IS  in  normal  times  enormous  and  the  banks  were  greatly  weak- 
ened by  the  situation. 

The  demoralization  of  industry  by  mobilization  of  labor   and 
through  much  of  France  an.l  Belgium  by  actual  invasion,  again 
made  it  impossible  for  great  numbers  of  del)tors  to  meet  their 
obbgation.s.     For  all  these  rea.sons.  it  is  clear  that  a  ditticult  sit- 
uation w;is  created  for  banks  and  the  whole  credit  system.     When 
to  this  is  ad(ie<I  the  fact  that  France  had  been  in  depression  and 
oven  criMs  t,  r  two  years  preceding  the  war ;  that  the  great  private 
-anks  ot  France  were  demoralized  bv  lo.sses  in  the  period  pre- 
ceding the  outbreak  of  the  war.  growing  largelv  out   of  bad 
foreign  investments;  that  the  private  banks  in  France  and  joint 
sMck  banks  in   Englan.l   .howed  themselves  unexpcctediv  cow- 
ardly—in  France  much  more  than  in  England— it  is  perfectly 
clear  that  the  .situation  called  f,,r  extraonlinarv  remedies. 

The  first  of  these  extraordinary  remedies  we  have  already 
mentioned,  the  closing  of  the  stock  exchanges.  This  was  done 
m  considerable  degree  for  the  protection  of  the  banks  By 
long  standing  tradition,  banks  arc  accustomed  to  reckon  the  price 
of  the  stock  exchange  collateral  on  which  they  lend,  during  the 
hours  that  the  stock  exchange  is  closed,  at  the  closing  price  of 


INTRODUCTION 


9 


the  last  session.  With  tlie  certainty  that  stock  exchange  prices 
would  go  indefinitely  lower  if  the  stock  exchanges  remained 
open,  there  was  also  the  certainty  that  the  margin  of  protection 
which  the  bankers  require  in  connection  with  collateral  loans 
would  be  more  than  wiped  out.  The  usual  remedy  which  a 
banker  can  ajjply  when  his  margin  on  a  collateral  loan  is  in 
danger  was  not  available.  In  such  a  situation,  a  banker  com- 
monly calls  on  the  borrower  to  provide  more  security,  and  if 
the  l)orrower  is  unable  to  do  this,  the  banker  sells  the  collateral 
for  what  it  will  bring  in  the  market,  applies  the  proceeds  to 
paying  ofif  the  collateral  loan  and  turns  over  the  balance,  if  any, 
to  the  borrower.  But  in  this  great  emergency,  neither  bankers 
nor  anyone  else  could  have  any  reasonable  expectation  of  selling 
securities  in  considerable  amount  for  enough  to  protect  the  loans 
they  were  supposed  to  secure.  When  the  stock  exchanges  closed, 
the  banks  could  continue  to  reckon  the  securities  at  the  last 
closing  price  and  thus  avoid  the  technical  admission  that  their 
assets  were  impaired,  and  brokers  could  be  protected  against 
the  danger  of  the  banks'  "  selling  them  out  "  at  a  loss. 

But  more  drastic  measures  were  applied  in  England  and 
France,  and  for  that  matter,  despite  denials.'  in  Germany. 
Mumtoria  '■  re  applied.  By  decree  of  the  state,  debtors  were 
relieved  .  rying  degree  of  the  necessity  of  meeting  their 
obligations  .  the  time  they  fell  due  and  were  given  time  to 
gather  their  wits,  to  set  their  houses  in  order  and  to  make  such 
use  as  they  could  of  slow  assets  in  protecting  their  solvency. 
There  were  no  moratoria  in  the  United  States,  but  in  New  i'ork 
and  other  financial  centers,  b)  general  agreement  of  the  banks, 
clearing  houses,  stock  exchanges  and  other  financial  institutions, 
the  (febtors  were  protected  from  pressure  by  creditors  in  con- 
nection with  stock  exchange  engagements. 

.Another  means  of  meeting  the  collapse  of  the  credit  system 
was  aid  trim  the  central  banks  in  Germany,  France  and 
I'^ngland.  This  aid  in  Germany.  England  and  F>ance  took 
the  form  of  rcdiscounting  the  paper  held  by  the  private  banks 
and  other  dealers  in  bills  and  notes  and  in  a  great  expansion  of 
'  I'ide  Uughliii:  CrrJil  of  the  Xations.    New  York,  1918,  pages  2Z4-227. 


10  KFFIiCTS  OF   Till:   WAR  O.V    MONEY,   CREDIT   AND   BANKING 

the  luiti's  or  deposits  of  the  central  banks.  In  New  York,  where 
there  was  no  central  hank,  there  was  still  an  informal  pooling  of 
bank  resources  and  close  cooperati(Mi  among  the  banks. 

Another  remedy  applied  very  generally  was  the  issue  in  one 
form  or  another  of  emergency  currency  for  general  circulation: 
in  the  I'nited  States  the  .Mdrich-\'reeland  notes,  in  Great 
liriiaiii  a  special  emergency  currency  issued  by  the  government, 
and  ill  France  a  great  flood  of  notes  of  the  Banque  de  France 
with  some  s])ecial  emergency  currency.  A  further  form  of 
extraordinary  remedy  was  concerted  action  to  handle  the  foreign 
exchange  problem. 

One  of  the  first  great  problems  which  the  outbreak  of  the  war 
occasioned,  and  a  problem  of  the  very  first  magnitude  throughout 
the  war,  has  been  that  of  obtaining  funds  for  the  gigantic  war 
expenditures  by  the  governments,  a  fiscal  problem.  In  general, 
there  are  five  main  ways  in  which  states  may  provide  for  war 
expenditures : 

( a )  By  taxation 

(b)  By  long  term  Ixinds 

(c)  By  short  term  Treasury  bills 

(d)  By  advances  from  a  state  bank  of  issue  in  the  form  of 
bank  notes 

fe)  By  a  direct  issue  of  paper  money  by  the  government 
The  last  method  was  used  to  a  considerable  extent  by  the  North- 
ern government  during  the  .American  Civil  War.  It  is  commonly 
recognized  as  the  least  desirable  form  of  financing  a  war,  and  in 
form  lias  been  avoided  by  all  the  major  belligerents  in  the  present 
war.  Practically,  however,  the  distinction  between  government 
paper  and  note  issue  by  the  national  banks  of  Russia  or  Austria 
is  hard  to  draw:  while  the  legal  tender  notes  of  the  German  loan 
bureaus  {  Darlrhiiskassnisclwinc) ,  available  as  legal  reserve  for 
the  notes  of  the  Reichsbank,  are  also  practically  not  to  be  dis- 
tinguished from  a  paper  money  issued  directly  by  the  govern- 
ment, with  legal  tender  privilege,  to  meet  the  fiscal  needs  of  the 
state.  The  notes  of  the  Ranf|ue  de  France  also  have  lieen  issued 
largely  in  response  to  fiscal  needs.  The  government  paper  issued 
by  Great  Britain  has  apparently  been  kept  carefully  divorced  from 


INTRODUCTION 


11 


the  fiscal  operations  of  the  state  and  apparently  has  been  issued 
by  the  government  to  the  banks  tu  meet  the  needs  of  circu- 
lation. 

On  the  whole,  Great  Britain  and  the  United  States  have  made 
large  use  of  long  time  loans  and  taxes,  and  have  called  on  tlie 
banks  chiefly  in  connection  with  short  time  Treasury  bills  or  certi- 
ficates, although,  of  course,  banks  in  Great  Britain  and  the 
United  States  have  purchased  long  time  bonds  and  have  made 
substantial  loans  with  such  bonds  as  collateral  security.  To  a 
much  greater  extent,  however,  than  in  continental  Europe,  Great 
Britain  and  the  United  States  have  financed  the  war  by  real  sul>- 
tractions  from  the  incomes  (jf  the  people  rather  than  by  mere 
additions  to  bank  credit. 

It  is  less  easy  to  speak  with  confidence  of  the  situation  in 
France.  France  has  done  little  with  taxation,  and,  to  a  very 
large  extent,  has  relied  on  short  term  loans.  But  the  short  term 
loans  appear  to  have  been  taken  in  France  largely  by  the  people, 
and,  with  the  exception  of  the  Banque  de  France  itself,  there  has 
probably  been  an  actual  contraction  of  bank  credit  in  France 
during  most  of  the  war.  It  is  probably  true  that  France,  as  well 
as  Great  Britain  and  the  United  States,  has  secured  the  major 
part  of  her  fiscal  resources  during  the  war  from  the  current 
income  of  the  people. 

We  have  already  seen  that  the  changes  in  foreign  trade  are, 
on  the  physical  side,  matters  of  outstanding  significance.  The 
European  Entente  Allies,  purchasing  heavily  in  the  United 
States  and  from  other  neutrals,  have  had  an  ever  increasing 
adverse  balance  of  trade,  which  at  the  present  aggregates  many 
billions  of  dollars.  This  fact  has  given  rise  to  some  of  the  most 
critical  and  interesting  financial  problems  of  the  war.  Ordinarily, 
within  fairly  short  intervals,  a  country's  exports  and  imports 
roughly  balance.  If,  through  considerable  periods,  the  physical 
item---  of  exports  and  imports  do  not  balance,  it  is  usually  easy  to 
find  invisible  items  that  complete  the  balance  sheet :  interest  pay- 
ments, freights,  insurance  premiums,  banking  commissions, 
travelers'  expenditures,  investments.  Items  of  this  sort  can 
usually  be  counted  on  to  explain  such  differences  between  imports 


12  EFFECTS   OF   THS   WAR   OX    MONEY.    CKEDIT    AND   BANKING 

and  exports  as  occur.     Balances  still  unmet  are  conmionly  settlej 
with  small  shipments  of  guld. 

rhe  credit  resources  ,,i  1-rance.  I-ngland  and  other  European 
belh-erents  have  been  strained  in  meeting  such  an  adverse  trade 
balance  as  the  past  tour  years  have  hrought  ahout.     The  out- 
break of  the  war  saw    I'uj^land  and   France   lavorablv   placed. 
New  \ork  was  indebted  to  them  partly  because  of  shipment>  of 
commodities  earlier  in  the  year,  but  more  because  of  the  heavy 
^eIlinJ,r  nt  securities  on  the  New  York  stock  exchange.     I'or  a 
time  the  e.xch;mge  rates  in  Xew  York  ruled  in   favor  of  I'aris 
an.l  Lon.lon  and  Xew  York  e.xported  gold,  not  indeed  to  London 
because  of  tlangers  at  sea.  bat  to  Ottawa,  where  the  Bank  of 
England  established  a  depository.     With   Decend)er,    I'.Hl,  the 
tide  turned,  however,  as  a  consequence  of  increasing  shipments 
of  goods  from  the   United  States  to  the  .\llie>  and   from  the 
beginning  of  VM:>  to  March.  HUT,  when  the  fnited  .States  broke 
with  Cermany.  there  was  a  steady  stream  of  gold  coming  to  the 
L  mted    States,   chieily   through    England,   amounting  in   all    to 
over  a  billion  dollars. 

This  gold,  however,  paid  for  a  minor  fraction  of  the  adverse 
tnidc  b,il.ince.  TIr.  re.^t  was  paid  for  partly  by  the  return  of 
securities  to  the  L/nitcd  States,  partly  by  <lirect  government  bor- 
rowings by  I-rancc  and  ( ireat  Britain  in  the  United  States,  and 
partly  by  adjustments  of  short  term  mercantile  credits.  With 
the  cntrv  of  the  United  States  into  the  war.  the  adverse  tmde 
balance  has  been  met  bv  direct  loans  bv  the  le.kral  government  to 
Us  allies.  In  connecti.in  with  the  loans  made  before  the  entry  of 
the  Unite.l  States  into  the  war,  it  is  interesting  to  note  that 
^ome  of  tiuMu  have  been  b.iscd  „pnn  .\merican  >ecurities  owned 
by  Enn.pean  investors,  mobdize.i  by  the  governments  ,,f  |>ance 
and  'ireat  liritain,  .■ind  byiH.thecatei!  in  .Xew  \nvk. 

'Mie  progress  ,,i  tlir  u.ir  h,-,.  |„rn  m.irked  bv  more  and  more 
direct  government, il  control  of  prices,  industry,  shipping,  basic 
rau  ni.iten.iU,  railway  trmsportatioii,  etc.,  as  "the  world's  phvs- 
ical  r.-,mrces  have  been  progressively  straiiie.l.  The  course  of 
pricr.  dnruu.  the  war  li.is  attracted  great  attenti..n  and  has  been 
one  oi  the  dramatic  features  of  it.     There  has  been  a  worldwide 


IXTUOULCTIUN 


13 


rise  i>i  commodity  prices,  the  inevitable  consequence  of  a  workl- 
wide  scarcity  oi"  commodities,  due  to  the  tact  that  .■)(),000,U()() 
men  have  been  witlulrawn  from  industry  and  liave  been  put  to 
work  in  the  most  destructive  kind  of  consumption  of  the  products 
of  industry,  to  tlie  fact  tiiat  transportation  resources  have  been 
diminished  and  made  precari(jus,  and  to  tiie  fact  tliat  industry, 
where  not  directly  destroyed,  has  been  (iemoralize<l  and  rendered 
less  productive  by  the  i^eneral  interruption  of  the  ordinary  course 
of  trade.  In  terms  of  f^^old,  therefore,  commodities  in  },'eneral 
have  risen  in  price. 

To  tliis  rise  in  gold  prices,  there  has  been  superadded  in 
various  countries  a  furtlier  rise  in  jirices  occasioned  by  the 
depreci.itii.n  of  paper  currency  no  longer  convertible  into  gold. 
This  i>  true  in  an  overwhelming  degree  in  Kussi.i,  iti  large  degree 
in  .\ustria  and  (.^rmany,  in  tnnsideralile  measure  in  France,  and 
to  ^ome  e.Ntent  in  ( ireat  P)rit;uu. 

I  he  cliange  in  prices,  however,  has  not  U'en  all  in  one  direction. 
.\  few  commodities  have  not  risen.  Coffee  and  India  rul)l)er  in 
the  Lnited  States  would  be  cases  where  commodities  were  as 
abundant  for  ordinary  civilian  consumption  during  the  war  a> 
they  were  before  the  war.  They  did  not  rise  in  price  in  the 
United  States.  In  countries  where  currency  depreciatii  n  is  not 
a  major  f.ictor,  the  jirices  of  sto  i.s,  bonds  and  real  estate  have 
shown  a  large  decline.  This  is  due  partly  to  uncertainty  a>  to  the 
future  of  certain  securities,  but  chietly  to  a  rising  disct  unt  on  the 
future,  as  the  pressure  of  present  needs  forces  g(ivernnients  and 
peoples  to  mortgage  future  incomes  increasingly  to  obtain  the 
means  of  carrying  on  the  war  and  sustaining  life.  The  correla- 
tives are  ol  course  rising  |(  ng  time  interest  rates  and  rising  com- 
m.xlity  prices.  This  is  strikingly  true  in  the  United  States  and 
Cireat  ">ritain.  It  appears  to  be  true  also  in  France,  at  least  so 
lar  as  the  securities  (in  the  h'rench  bourse  may  be  taken  as  typical. 
In  general,  the  w.ir  has  been  accompanied  by  a  large  expansion 
of  bank  credit-.  This  has  been  true  in  (Ireat  Hritain  ;  it  has  Inien 
true  in  the  United  States;  it  has  been  true  to  a  verv  great  degree 
HI  (ierm.uiy.  In  I'rance,  however,  although  the  Hanqite  de 
France  has  expanded  credits  enormously,  the   whole  increa.se 


14 


El-KECTS  OK   THi:   WAR  ON    Mn\EY,    CREDIT    AND  BANKING 


being  in  credits  to  the  state,  the  other  Iianks  have,  on  the  whole, 
contracted  their  lending  operations  and  tlieir  volume  of  deposits 
subject  to  check  or  draft,  at  least  through  most  of  the  war  period. 

In  Great  Britain,  Franco  and  the  United  States,  the  savings 
b'  .ks  have  all  been  in  some  measure  alarmerl  by  the  shrinkage 
in  the  market  quotations  of  their  investments  and  by  the  ten- 
dency during  the  earlier  period  of  the  war  of  depositors  to  with- 
draw funds.  In  all  three  countries  there  has  developed  the 
understanding  that  public  action  will  i)e  taken  to  the  extent  that 
is  necessary  to  protect  savings  banks  from  insolvency.  The 
problem  seems  to  have  cleared  for  the  savings  banks  of  the 
L'nited  States  without  much  positive  action.  More  serious  in 
Great  Britain  and  France,  the  problem  now  appears  to  be  a 
manageable  one. 

The  position  of  the  savings  banks  is  typical  of  all  recipients  of 
fixed  incomes  in  a  period  of  ranidly  rising  prices  and  rapidly 
rising  intere^t  rates.  Railroads  and  municipal  public  utilities, 
whose  ciiarges  are  fixed  and  whost  c(jsts  are  rising,  have  suffered 
during  the  war;  the  gold  mining  ndustry  has  suffered;  men  on 
fixe<l  salaries  or  retired  capitalists  living  on  investments  have 
found  their  real  income  steadily  reduced  with  the  rising  prices. 
in  Kngland,  France  and  the  United  States,  some  form  of  gov- 
ernment guarantee  of  r.iilroad  credit  has  been  found  necessary. 

Partly  as  a  consequence  of  the  heavy  drains  made  by  the 
warring  states  upon  the  loanable  funds  of  the  various  countries, 
it  has  been  increasingly  diffic-ilt  to  finance  private  enterpri.ses. 
In  part,  this  has  been  desirable.  It  is  not  well  tliat  new  enterprises 
producing  luxuries  or  other  things  that  the  people  can  get  along 
without  -hould  expand,  competing  witli  the  governments  for 
lalior  and  supplies  in  the  market,  but  the  necessity  for  financing 
.lie  new  w.ir  time  industries  has  been  very  great.  On  tiie  whole, 
Iirivate  capital  has  been  adequate  for  this  in  Great  Britain  and 
tlie  United  .Stales,  though  some  state  assistance  has  been  neces- 
sary. In  I'Vance.  however,  state  aid  on  a  cou'^iderable  scale  has 
been  extended  to  necessary  enterprises,  including  ag-iculture. 

The  enormous  volume  of  war  time  expenditures  has  led  to 
great  mdustrial  activity  throughout  most  of  the  world,  and  the 


INTRODUCTION 


15 


huge  profits  resulting  from  the  rising  prices  connected  witli  the 
nar  have  in  large  degree  buried  the  financial  difficulties  which  the 
outbreak  of  the  war  occasioned.  The  credit  system  has  come  to 
life  again,  moratoria  have  largely  ijeen  dispensed  with,  and 
pending  insolvencies  largely  averted.  To  a  very  considerable 
extent,  it  seems,  moreover,  particularly  in  the  United  States, 
that  business  men.  foreseeing  a  shock  when  the  war  is  over, 
anticipating  a  drastic  drop  in  prices  with  the  falling  off  of  war 
or('"rj  and  with  the  return  of  labor  to  ordinary  pursuits,  have 
buttressed  their  positions  with  large  reserves,  have  charged  to 
depreciation  the  extraordinary  expenditures  for  new  imildings 
and  equipment  in  comiection  with  the  war  time  industries,  and 
are  prepared  to  readjust  themselves  to  a  lower  level  of  com- 
modity prices  witliout  bankruptcy. 

The  problem  of  the  huge  debts  of  the  warring  states,  which 
we  shall  deal  with  in  later  chapters,  has  given  Loncern  to  very 
manv  students.  It  appears  probable,  however,  that  there  need 
not  be  in  these  war  debts  any  insurmountable  dangers  to  solvency 
after  the  war. 

Tn  what  follows  we  shall  undertake  to  treat  these  major  topics 
and  others  necessarily  connected  with  them,  with  considerable 
fulness  in  the  case  of  Trance.  The  discussion  of  money,  credit 
and  banking  in  the  United  States  will  be  much  briefer.  The  rea- 
son for  putting  the  chief  emphasis  upon  France  in  our  discussion 
i>  that  the  war  time  developments  of  the  United  States  are  much 
more  familiar  to  American  readers  than  are  those  in  France. 


PART  I 
FRANCE 


CHAPTER  II 


Money,  Credit  and  Banking  in  France 


Tt  would  be  hard  to  find  a  sharper  contrast  among  the  great 
banking  systems  of  tlie  world  than  that  between  France  and  the 
United  States.  The  difference  is  so  great  that  it  is  not  always 
easy  for  trained  students  whose  backgn^und  is  primarily  French, 
and  trained  students  whose  background  is  primarily  American, 
to  find  a  common  language  or  to  realize  thet  beneath  the  differ- 
ence in  forms  there  are  many  common  principles  in  (jperation. 
Tlie  American  takes  for  granted  many  practices,  and  theories 
regarding  those  practices,  of  which  some  of  the  best  informeil 
French  bankers  seem  to  know  little;  while  the  French  student 
takes  for  granted  doctrines  and  practices  which  must  be  verv 
carefully  explained  indeed  to  the  American  student  of  this 
suliject. 

One  dililiculty  in  the  way  of  understanding  the  French  system 
is  the  paucity  of  statistical  materials  in  usable  shape.'  With  the 
exceptiiiii  of  tlie  Iiancjue  de  France,  the  Caisse  dcs  Depots  et 
Consignations,  and  .some  minor  semi-public  institutions  of  bank- 
ing character,  French  banks  are  wholly  private  institutions.  If 
incorporated  at  all,  they  are  incorporated  under  the  general 
corporation  laws,  and  subject  to  no  more  state  control  than  a 
manufacturing  corporation  would  be.  The  state  requires  no 
reports  from  them  in  uniform  style,  or.  indeed,  any  reports  at 
all,  in  general,  exce|)t  for  taxation  purposes.  Commonly  they 
make  annual  reports  to  their  stockholders,  and  frequently  they 
publish  .some  sort  of  l)alance  sheet  statements  at  intervals  between 
the  annual  reports.     But  it  is  not  easy  to  get  information  from 

'  Cf.  npiniiin  oxpri'sst'd  in  Statesman's  Year  Book-.  W2.  page  7''4,  where 
fiKiirt's  fir  the  private  banks  arc  (Uclared  to  be  so  unsatisfactory  as  not  to 
justify  rcpuhhcation. 

IB 


20  KFFFXTS   OF   TFIE   U  AR   ..\    M.INKV,    CRK r)l  r    AM)   RANKING 

tliese  reports  as  to  their  actual  operations.  Take,  tor  example, 
the  statement  of  the  Credit  Lyonnais  of  I)ecenil)er  ;il.  I'.to.-,.  The 
statement  of  assets  is  as  follows: 

ACTIF  DU  CREDIT  LVC.WAIS 

December  31,  1905 

Espcccsen  caisse  et  clans  les  l,an,|ue. Pr.  171,554,052  82 

A  vanc^  ^i.Karan.ies  cV  Repor,s.V;.V.V.V;.  .  .■.■..■;;;.•;. .  ;  '  '^^^^^'^^l 

L oniptcs  courants    -,:  ;.;,,,, 

For.feuillct.m..   (aa.on>..  l.ons.  nMi^vuiuns' ci' rentes  )  i;.: !  5  446  75485 

(  nmptes  .1  orHres  et  divers ijT-iv-j/-, 

lininenl)Irs                                                      1,422.7/2.67 

'"'^'    .v.ommm 

Fr.  2,176,736,614.41 
Just  because  of  the  uncertainty  as  to  the  meaning  of  certain 
of  these  items,  it  has  seemed  best  to  give  them  in  the  bVench 
version.    The  first  item,  cash  on  hand  and  in  the  banks,  will  .seem 
familiar  enough  to  those  used  to  the  accounts  of  English  joint 
stock  banks,      French  bankers  attach  little  importance  to  cash 
reserves.     If  their  portfolios  contain  plenty  of  licpiid  paper,  redis- 
c  untable  at  the  iiaiuiue  de  France,  they  find  their  real  reserves 
there,  and  the  question  of  actiia'  cash  in  their  vaults  is  purely  a 
matter  (.f  convenience.     •' /■s/^rcc  "  obviously  can  not  be  trans- 
lated •'  si)ecie."  which  would  mean,  in  Fnglish.  gold  and  silver 
coin,     Tresumbably  -  cspars  -  means,  simplv.  "  readv  funds" 
in  the  money  market  sense.  inclu<ling  gold  and  silver  coin,  notes 
ot    the   Banque  de   France,  and   ileposits   with   rhe   IJanque   .le 
France  and  other  banks.     American  bankers  supplv  nmch  more 
detailed   iiifnrmati.  n   on   thi     point    in   their   rep.irts.      French 
bankers  other  than  the  Baiuiue  de  I-rance— and  for  that  matter 
FnglLsh  bankers— free    from   the   absurdity  of   legal    minimum 
reserves,  and  free  to  a  large  degree  from  tlie  difficulties  of  get- 
ting cash  in  an  emergency  which   .American  bankers,  until  re- 
cently, have  faced,  have  been  accustomed  to  regard  the  matter 
as  relatively  unimportant. 

Real  question  ari  ;es.  however,  as  to  the  second  item,  "port- 
folio." whici)  contains  over  a  billion  francs!  What  is  included 
in  this  huge  lump  sum-  The  bank  does  not  say  "commercial 
portfolio."     .A  common  understanding  would  seem  to  be  that 


1-RANtE 


21 


the  item  contains  discounted  commercial  bills  of  exchange,  with 
short  maturities,  but  critics  of  the  great  private  Iwnks  liave 
suggested  that  many  other  tilings  may  be  tiicre,  iiicluiling  securi- 
ties owned,  and  paper  tlra-.vn  in  connection  with  stock  market 
operations.  In  any  case,  a  subdivision  of  this  huge  item  among 
the  branches  of  the  great  company  would  Ije  illuminating.'  Dur- 
ing the  war,  as  we  shall  see,  "  ])ort folio  "  has  been  combined  with 
other  elements  in  tlie  statement  of  this  bank,  in  a  very  confusing 
and  battling  manner. 

"  .\dvances  on  reports  "  is  definite  enough.  It  means  stock 
market  loans  made  till  the  ne.xt  settlement  day  on  the  security  of 
stock  and  bond  collateral.  The  whole  item  "advances  on 
'  garanties  '  and  reports,"  is  translated  as  "  loans  against  securi- 
ties and  contangoes  "  -  by  the  London  Economist  of  May  17, 
1IH;J,  while  in  English  statements  published  by  the  Credit 
Lyonnais  itself,  it  appears  (June  ."{(»,  1!)15)  as  "loans  against 
collateral  and  time  loans,"  and  (October  ;]1,  VM)s)  "call 
loans  and  time  hjans."  It  may  be  safely  taken  as  chiefly,  if 
not  exclusively,  a  figure  for  loans  in  connection  with  bijurse 
transactions. 

"  Cotiiptcs  counints."  current  accounts  (on  the  assets  side), 
is  an  item  which  would  find  its  nearest  counterpart  in  .\merican 
banking  under  the  head  of  "  overdrafts,"  though  it  is,  perhaps, 
misleading  to  say  this.  It  is  misleading,  first,  Ijecause  wiUi  us 
overdrafts  are  represented  by  actual  checks  drawn  on  the  bank, 
and  held  by  the  bank.  In  the  second  place,  in  .\merican  banking, 
overdrafts  are  generally  illegal,  or  at  all  events  regarded  as  bad 
banking,  while  there  is  luj  such  stigma  attached  to  this  item  in 

'  The  CrOilit  Lyonnais  .staled  to  the  .National  Monct.iry  Commission  that 
only  ..ommereial  and  nuluslrial  bills,  chiefly  commercial  Ijills,  were  mclmled 
here,  an<l  denied  tliat  its  security  liuldings  were  larger  than  shown  in  its 
puhhslucl  statement.  See  Senate  Document  405,  61st  Conj,'.,  2d  Sess  Com- 
pare with  this  statement  the  cont.ntions  of  Lysis;  Contr,-  d'Oh.jjrcliie 
tiiiaiiiur,'  ,-ii  iriincc,  l-'th  ed.,  I'aris,  1908  {La  kivin-),  pages  .?!,  5.V8(). 

'  'Ccmlango"  and  "report"  are,  respectively,  the  terms  nsed  m  London 
anil  Pans  to  descrihe  the  loans  made  on  collateral  security  till  the  next 
settlement  day,  cm  the  stock  exchange  or  the  honrse,  Idrtnightlv  settle- 
ments prev.iil  in  these  centers  Mislead  of  the  d.iily  settlements  made' in  New 
Nork.  -Contango"  is  also  applied  to  the  interest  rate  at  whi.h  these  loans 
are  made,  lor  <letails,  see  II.  C.  Kmerv :  .V/.i-rii/ii/i'iii  nil  the  Stnck  and 
I  roducc  /•..if/mii.i.v.f  I'l  the  I'nilcd  Stales.  The  term  "report"  is  also  used 
m   Berlin.     Neither  of  these  expressions  is  used  in  Xew  York. 


22 


EFFF.CTS   OF   THE   WAR   (IX    MONEY,    CREniT   AM)   HANKING 


French  l)anking.  The  term  "current  accounts"  appears  also 
on  the  'lability  side — in  the  statement  of  the  date  in  question  it 
stands  on  the  liability  side  at  .'<r)t).27L*,4,s4.7(!  francs.  It  is  a 
form  of  deposit,  with  overdraft  privilej^es.  The  active  business 
man  is  likely  to  have  a  "  cowptc  courant  "  rather  than  a  "  (tepot  " 
(deposit*.  If  he  overdraws  this  account,  he  becomes  a  debtor 
of  the  bank  to  the  e.xtent  of  the  overdraft,  and  pays  interest  on 
the  amounts  overdrawn  fur  tlic  time  that  his  account  remains 
overdrawn.  His  overdrawn  account  then  ai)pears  as  an  asset 
of  the  bank.  If  his  account  shows  a  positive  balance,  it  appears 
as  ■'  current  account  "  on  the  liability  side  of  tlie  bank's  statement. 
There  is  a  prior  understanding  as  to  how  much  he  may  overdraw 
— a  sort  of  "  line  of  credit  "  understanding.  Often  securities  or 
other  collateral  may  l>e  deposited  in  advance.  Such  a  practice  has 
been  well  known  in  some  of  our  southern  States  and  on  the 
Pacit'ic  coast  and  similar  practices  are  well  establi.shed  in  Scot- 
land and  in  England,  outside  of  London.  It  is  perfccdy  sound 
banking,  if  j)roperly  understood  and  safeguarded.  For  our 
present  purpo.ses,  however,  it  is  enough  to  note  that  not  much 
information  regarding  the  bank's  business  is  contained  in  the 
figure.  For  what  purposes  were  overdrafts  to  the  extent  of 
three  hundred  and  ninety-five  million  francs  permitted?  Critics, 
unable  to  find  elsewhere  in  the  bank's  statement  figures  which 
could  account  f(jr  the  sup])osed  operations  ui  the  bank  in  "  high 
finance,"  have  suggested  that  "  coiiiptcs  couraiits  "  may  in  no 
.small  part  re])rescnt  accounts  of  agents  of  the  bank  itself,  operat- 
ing on  the  bourse.' 

The  remaining  items  on  the  assets  side  are  small,  and  need  no 
comment,  except  that  the  very  smallness  of  the  item  "  pcrlfriiillc- 
titn-s"  (stock  and  bourl  portfolio)  would  r>trongly  suggest  that 
most  of  the  holdings  of  the  bank  in  securities  must  be  somewhere 
el^el  .\s  will  later  be  made  clear,  banks  (jf  the  character  of  the 
Credit  Lyonnai--  have  had  as  a  very  great  part  indeed  of  their 
busine-s  the  handling  of  securities,  particularly  foreign  issues 
which  were  to  be  marketed  to  their  depositor^,  and  whose  values 
meanwhile  must  be  protected  by  bourse  operations. 

'Cf.  Lysis,  of.  cit..  rages  58-.SO. 


FRANCE 


23 


On  the  liability  side,  three  items  aggregate  the  great  bulk  of 
the  whole : 


Kpots  et  bons  a  vue Fr.  705,650,500.36 

Comptes  Courants    856,272,484.76 

Acceptations   180,559,616.46 

Fr.  1,742,482,601.58 

Of  total  liabilities  of  2,170,736,614  francs,  1,742,482,614  are 
contained  in  these  three  items. 

It  is  not  alone  the  paucity  of  items,  the  lack  of  details,  in  such 
reports  that  baffle  us.  If  American  banks  gave  no  more  details 
than  this,  it  would  still  be  possible  to  trace  many  general  move- 
ments by  watching  their  changes,  because  we  could  localize 
them,  Cduipare  variations  in  different  States,  in  different  cities, 
and  in  different  sections  of  the  country.  But,  as  will  be  made 
clearer  later,  the  figures  for  the  few  great  banks  like  the  Credit 
Lyonnais  cover  all  sections  of  France,  where  their  branches  are 
widely  scattered,  and,  especially  in  the  case  of  the  Credit  Lyon- 
nais, numerous  foreign  branches  as  well. 

Rut  there  are  further  difficulties.  How  accurately  made  up  are 
the  figures  presented?  There  is  no  public  auditing.  The  state- 
ment has  been  repeatedly  made  in  France  that  the  figures  for 
profits  ul  the  Credit  Lyonnais  are  fictitious,  that  they  gen- 
erally approximate  the  actual  amount  declared  in  dividends, 
with  some  hundreds  of  thousands  of  francs  added  to  give  veri- 
similitude.' 

These  considerations  need  not  have  a  sinister  significance.  The 
first  thought  of  an  American  depositor  who  is  told  that  his  banker 
is  "  doctoring  "  his  balance  sheet  would  be  that  the  bank  is 
insolvent,  and  that  losses  are  thereby  being  concealed.  It  would 
appear  more  probable  that  the  French  banks  were  concealing 
profits  to  the  e.xtent  that  such  considerations  moved  them  at  all. 
In  lltno,  an  ofiicer  of  the  Credit  Lyonnais,  replying  to  a  stock- 
holder's question,  declined  to  give  out  figures  on  the  ground  that 
the  banks  were  subject  to  hea\;    taxation,  and  it  would  not  be 

'  L'/Hfonmilinii,   .^pril    12,    1905;    ibiJ.,   Mav   9,    1905.     Quoted   by    Lvsis, 
op.  cit.,  page  02. 


24  KII-ECTS   OF   THE   WAR   OX    MONEY,    CREDIT   AXD    HANKING 

wise-  to  reveal  them !  '  But  probably  the  fiiiidainental  r.-ason  is 
one  wliich  f^reat  private  hankers  in  many  countries  \  oiild  sympa- 
thize with:  I)ankiiig  is  a  delicate  matter;  it  is  not  well  for  the 
uninitiated  to  know  too  much  alw.t  it;  secrecy  and  privacy  are 
the  lianker's  right.  Much  is  said  in  France  about  the  necessity 
of  guarding  secrets  from  competitors— a  defense  that  evokes  n 
good  deal  of  sarcasm  from  those  critics  of  the  French  "money 
trust  "  who  maintain  that  all  the  great  private  banks  work  in 
perfect  accord. 

Enougli  has  l)een  said  to  make  it  clear  that,  in  general,  statis- 
tical materials  for  the  study  of  French  banking  must  be  inade- 
quate, and  that  to  a  very  unsatisfactory  extent  we  must  rely  on 
information  which  lacks  quantitative  exactness.  This  is  especially 
true  during  tlie  war  period,  as  the  method  of  making  up  the 
balance  sheets  has  been  altered,  so  that  comparison  with  previous 
figures  is  very  difficult. 

Certain  general  C(Mitrasts  between  American  and  French  bank- 
ing will  perhai»  serve  best  to  get  the  French  system  before  us. 
This  contrast  will  be  more  effectively  made  if  we  think  of  both 
systems  as  they  stood  in  li)14,  before  France  was  torn  by  war, 
and  before  our  federal  reserve  system  was  inaugurated.  Subse- 
quent pages  will  deal  with  the  four  years  that  have  passed  since 
then. 

A  familiar  contrast  is  that  between  centralized  and  decentral- 
ize.l  banking.  French  banking  is  highly  centralized,  while  in 
.America  there  were  over  twenty-five  thousand  independent  bank- 
i!ij;  I  -t-.tutior.i- most  of  wliich  were  and  are  really  independent. 
The  great  central  bank,  the  Banque  de  I'>ance,  holder  uf  tlie 
great  gold  reserve,  monopolist  in  the  field  of  note  issue  in  France, 
standing  ready  to  rediscount  the  pajjcr  of  the  other  banks  at  any 
time,  dealing  chietly  with  the  banks  rather  than  directly  with  the 
people,  closely  allied  with  the  state,  the  reliance  of  the  state  in 

'  Ly-i-,  »/-.  cil..  iMgi-.  80-81,  It  IS  very  diiricult  t.i  make  miicli  „uf  of 
llK'  anmial  npnrt^  to  >t(.cklK.I,ler,s,  Tliey  deal  laij;clv  in  laiial  giMioralitics 
-a  pnictice  Mot  unknown  to  .Ami-rican  corporation  officials.  I.vsis  nnotcs 
laiil  Lcroy-Beauliui  as  follows:  "  11  faut  tiicn  Ic  dire,  la  mOthode  nrdinairc- 
ment  .-nvie  en  ^rancc  et  pent-etro  ailleurs  poiir  les  rapport^  de  la  direction 
avec  le-,  .ichonnairos  est  nne  metliode  tontc  illusoirc.  Elle  ne  donne  au- 
cune  srarantie  de  bonne  Kestion,"     Pace  89. 


FRANCE 


25 


times  of  emergency — this  feature  of  French  banking,  wholly 
lacking  in  11)14  in  the  United  States,  is  familiar  enough  to  Amer- 
ican students.  But  French  centralization  goes  far  Ijeyond  that. 
.Apart  from  the  Banque  de  France,  there  are  some  four  or  five 
otlicr  great  private  banks  which  do  most  of  the  banking  business 
of  the  country.  Chief  among  these  are  the  Credit  Lyonnais,  the 
Societe  Generale  pour  Favoriser  le  Developpement  du  Commerce 
et  de  rindustrie  en  France  (commonly  known  as  the  Societe 
Generale).  the  Comptoir  d'Fscompte,  the  Credit  Industricl. 
The  first  three  really  stand  in  a  class  by  themselves,  as  tin-  great 
credit  houses.  These  banks  all  have  numerous  branches  scat- 
tered all  over  France  (except  that  the  Credit  Indusiriel  confines 
itself  to  Paris).  The  Societe  Generale  has  1.000  branches.  The 
Credit  Lyonnais  has  branches,  not  only  in  I'rance  but  in  Russia, 
where  "  Lyonski  Kredit  "  is  a  familiar  name,  in  the  Balkans,  in 
almost  every  part  of  luirope,  and  in  other  continents.  C".::er 
I'rench  banks  also  have  foreign  branches.  In  recent  decades, 
these  great  credit  houses  have  rapidly  al)sorl)ed  or  driven  out  of 
business  the  independent  provincial  and  local  banks,  although 
th'jre  remain  strcmg  institutions  among  these,  whose  relative 
position  has  I)een  somewhat  strengthened  by  the  events  of  the 
war.'  In  general,  however,  a  local  bank  in  France  is  a  branch 
of  a  great  Paris  institution,  receives  instructions  from  Paris,  is 
maimed  liy  men  sent  out  or  chosen  from  Paris,  and  is  subject  to 
little  control  by  local  business  men  or  local  authorities. 

The  institutions  .so  far  named  deal  directly  with  the  people, 
and  especially  receive  (le])osits  of  almost  all  sizes  from  the  general 
pul)lic.  There  is,  however,  another  institutio.i.  less  conspicuous 
than  those  named,  but  pnil)ably  as  powerful  as  any  of  them, 
namely,  the  P>an(|ue  de  Paris  et  des  Pays-Has.  This  institution 
does  niit  receive  the  deposits  of  the  general  puljlic  or  discount 
commercial  i)aper  as  a  regular  business.  Its  nearest  counterpart 
in  the  United  States  would  be  J.  P.  Morgan  and  Co.  Its  power, 
very  great,  is  commonly  exerted  indirectly,  through  its  relations 
with  other  houses.  Its  own  operations  are  largely  in  the  field  of 
foreign  exchange,  security  underwriting  and  marketing,  handling 

'  See  the   summary   in   the   Lotulon  Economist  of   August   11,   1917,  page 
209,  of  an  interesting  study  of  !>ench  provinci.il  banks  by  Leon  Barety. 


2t')  EFFECTS  OF   THE   WAR   ON'    MONEY,    CREDIT    AM)   BANKING 

the  deposits  of  certain  great  corporations  in  whose  securities  it 
deals,  etc. 

Most  of  these  institutions  are  supposed  to  l)e  bound  together 
by  close  under.-tandings,  and  to  work  in  close  harmony.  Xo 
such  charges  of  a  "money  tru^t  "  have  ever  been  i)rought  in 
the  L'nited  States  as  have  been  made  by  French  critics  of  these 
institutions.  The  nature  of  this  cooperation  will  be^t  Iw  con- 
sidered when  we  take  up  the  kinds  of  banking  business  done 
in  Fr^'nce. 

But  the  centralization  has  gone  much  further  tb-ut  thi>.  In 
.America,  there  are  m.iny  thou.sands  of  in(le])endcnt  s;  >.  iiigs  banks, 
each,  under  general  laws  and  some  State  supervi  ;i.  fret  to 
make  its  own  investments.  In  bVance,  virtually  ;■!!  the  local 
savings  banks  (  Ciiis.u..  ii\-par(pu-  ordiiiairrs)  are  reijuired  to  turn 
over  the  funds  dei>osited  with  them  to  a  great  central  state 
institution.  La  C'aisse  des  Dei)ots  et  tdnsignatioiis.  which  makes 
the  investments  for  them,  cluetly  in  the  ri-iitis.  the  long  time 
obligations  of  the  b'rench  (iovernmeut. 

In  the  midst  of  thi>  ceinr.iliz.ition,  the  independent  local  banks 
have  themselves  felt  it  necessary  to  combine.  Many  of  the 
provincial  banks  are  themselves  pos.sessed  of  numerous  branches. 
There  are  altogether  .some  l',T<>i>  or  more  of  local  and  pro,incial 
banks,  many  of  tiiem  insigniticant  in  size.  In  I'.Mi.".,  :',-2:,  of 
them  formed  a  protective  union,  the  Societe  Centrale  des  lianques 
de  I'rovince.  which  also  carries  on  in  Paris  a  banking  business, 
chieti  ■  concerned  with  the  iiuge  security  operations  which  are 
concentrated  there.' 

One  great  institution,  the  Credit  b'oncier,  with  branches 
throughout  l-'rance,  does  mv)st  of  the  mortgage  loan  business  in 
the  cities,  it  was  anticipate*',  at  the  time  of  its  organization,  that 
it  w  uld  supi)ly  agricultural  credit  largely,  but  this  it  has  done  to 
a  very  slij-lu  extent,  .\gricultm-al  mortgages  in  I'rance  are 
chielly  taken  by  in(li\iduals,  rather  than  by  institution^  and 
I'Vench  agricultural  kinds  are  not  heavily  mortgaged.' 

'  I.aiiKliliii:  Cr.-tlit  ..f  llu-  Xati.xis.  \vw  \-nU.  1'»1H.  p.i^ro  14/ 

am  iiul.btiMl  in  Dr,  J.  F.  F>o, ,.  for  iiifonn;iti.iii  rm  inline  .ic-icMltiit.il 
crt'ilil  ct  I  rancc.  Mr.  Pope  M.itiv  that  it  i'^  virlii.illv  inip"*.il.lc  with  data 
now  arcc-Mblf,  to  Kivr  an   arcimnl  i.f   uar  rhaiiKcs  in   tliis   ficM 


FRANCE 


27 


Xext  to  its  highly  centrahzed  character,  we  should  perhaps 
mention  tlie  important  role  of  bank  notes  in  i  encli  banking  as  a 
feature  marking  it  otY  from  Amerirn:;  l)anking.  Notes  of  the 
lianqne  de  France  have  Ijeen  the  main  means  of  making  payments 
in  l-"rance.  Cliecks  drawn  against  deposit  acc(junts  have  had  a 
very  limited  use.  This  generalizati(jn  is  one  to  which  we  are 
accustomed.  The  situation  is,  however,  more  complicated  than 
this  simple  generalization  woulil  imply,  and  there  seems  to  be 
some  misunderstanding  even  among  I'rench  writers  who  have 
been  advocating  an  extension  of  the  check  and  deposit  system 
durii'.g  the  war  as  to  the  significance  of  the  contrast. 

In  .\nierica,  we  are  accustomed  to  the  doctrine  tliat  deposits 
grow  out  of  loans,  in  very  large  degree.  .\  bank,  making  a  loan 
to  a  depositor,  gives  him,  not  cash  or  bank  notes,  as  a  rule,  but 
a  deposit  credit,  .\gainst  this  he  draws  a  check,  which  is 
deixisited  by  the  one  to  whom  he  gives  it,  leading  to  ;i  tr.insfer 
nf  tlic  deposit  credit  on  the  books  cpf  tlie  bank,  if  both  are 
de()ositors  of  the  same  bank,  or,  through  familiar  clearing  Imuse 
m.ichiiH-ry,  to  a  deixisit  credit  in  some  other  bank,  witliout 
actual  transfer  of  cash  between  the  banks  to  any  considcraI)le 
jiercentage  of  the  amount  involved.  Deposits  with  us,  in  other 
words,  are  a  fabric  l)uilt  up  largely  by  the  creation  of  new  bank 
credits,  transferred  by  check,  rather  than  due  to  the  actual 
"  depositing  "  across  the  bank's  counter  of  actual  "  money  " 
(gold,  silver,  greenbacks,  national  bank  notes,  gold  and  silver  cer- 
tificates, etc.).  If  we  did  n(it  use  checks,  if  we  could  borrow 
from  the  banks  only  coin  or  bank  notes,  and  if  only  one  bank 
in  the  couiUry  had  the  power  to  issue  bank  notes,  it  is  not  easy 
to  see  how  deposit  banking  could  be  a  very  important  matter  in 
this  country.  .And  yet,  deposit  banking  is  very  iini)ortant  in 
f'rance.  In  I'"rance  f)ro])er,  only  the  Haiuiue  de  I'rance  can  issue 
notes.  (The  15an(|ue  de  I'.Mgerie,  chartered  by  the  l'"rench  (iov- 
crnment,  is  also  a  l)ank  of  issue,  privileged  to  issue  alnnit  .'id't.- 
0(Mi,0(Mt  francs  in  notes  before  the  war.  )  lUit  the  great  i  ... 
banks  have,  m  their  "deposits"  and  "  coiii/^tcs  coiirunts  m 
tlie  liabdity  side)  many  hillicms  of  francs.  I"or  the  Uanque  de 
France  itself,  on  February  1;!,   I'.'t-t,  the  "  coiiif<tcs  cuurants" 


2.S 


KFKKCTS  OK   TIIK   WAR   ON    M -|\EY,    CRKDIT    AN'D   DAN'KINd 


( lial)ility )  '  in  Paris  and  branches  amoimted  to  ti'.t.').(M)(i.(»(»0 
francs.  This  looks  small  when  compared  with  the  r),^4r).()(Hi,<Ml() 
francs  of  note  issue  shown  by  the  same  statement  of  the  Manciue 
de  brance.  and  would  make  it  appear  that  the  main  form  in  wiiich 
tliat  bank  extends  credit  is  clearly  in  note  issue.  Hut  it  nnist  be 
remembered  that  to  a  larf^e  extent  the  note  of  the  l'ian(|ue  de 
l-"rance  were  before  the  war  really  little  more  than  j;<'ld,  dr  c(-in, 
certiticates.  On  the  date  in  (piestion,  the  Han()ue  de  France  held 
a  metal  cover  for  the  notes  of  4,l'l'l',0(>(),(){»(»  francs,  the  ^^reat 
l)ulk  of  which  was  gold.  Only  the  '  uncovered  "  part  of  the  note 
issue  could  thus  repre>ent  a  real  extension  of  new  bank  credit. 
This  urcovered  note  issue  atnounted  to  only  l.(!j.;,(iO(i,(t(M) 
francs  o'l  thf  date  in  (juestion,  an  amount  lar},'er.  indeed,  than  the 
current  accounts  of  the  Hanijue  de  !•" ranee  by  nearly  a  billion 
franc;-,  but  still  a  very  small  amount  when  compared  with  the 
deposits  and  current  accounts  of  all  the  b'rench  banks,  including 
the  l!aiu|ue  de  I'rance  itself.  The  Credit  Lyonnais  alone,  for 
example,  at  alH)ut  the  .-ame  time  (  Hecemijer,  l'Jl,i)-  showed 
deposits  and  current  accounts  (liability)  combined  ajj^rcgatin^ 
about  l,JL'n,(MM(,(i(M»  francs,  an  amount  which  is  only  four 
hundred  millions  short  of  the  vmcovered  note  issue  of  the  Bancpie 
de  I'rance,  uid  which,  combineil  with  the  current  accounts  of  the 
I>an(|ue  de  I'rance,  excecd>  the  uncovered  nute  i>sue  b\  nearly 
three  hundred  millions,  if  deposit  banking  can  re])resent  real 
extensions  of  new  bank  credit  only  in  connection  with  checks, 
and  if  the  chief  form  of  credit  extension  in  l-Vance  is  by  means 
of  the  bank  note,  we  have  some  cur-ous  jjlienoinena  to  exi'lain. 

There  is  a  real  prolilem  here,  from  the  standpoint  of  out- 
familiar  only  with  .American  or  iuifjlish  bankiiu';.  if  the  state- 
ments commonly  made  al)out  checks  and  b.ink  notes  in  i'"rance 
are  to  be  acce|)ted.  .\nd  first,  it  nuist  be  observed,  that  the  use 
of  checks  in  I'rance,  even  before  the  w.ir,  w,is  by  no  means  so 
limited  as  many  have  supposed.     To  be  sure,  the  iditcicrjic  and 


'  I'lilikc    many    (if    the    I'ri'nili    lanks,    the    Uatii|iu'    i\v    I'raiire    shows    nn 

",  unifies    iiiiiriiiili"   ciii    llu'    .isMts    -i.li,.       Ihf    term    '■  rlcpo^iis  "    Wdiild    lir 
ii-cil  In   .111   Amcruan  liaiik  Id  (lisrnbt  this  ittm  in  the  Hainim'  <li'   France 
^ntiiiii  111 
■  lull, loll  /■:,■, 'iiomisl.  .May  i.\  1014,  pane  1254. 


FRANCE 


29 


the  small  tradesman  would  commonly  have  nothing  to  do  with 
checks.  To  be  sure,  the  general  practice,  in  paying  house  rents, 
in  paying  retail  bills,  in  paying  wages,  in  paying  taxes,  and  in 
many  other  places  where  an  American  would  unhesitatingly  draw 
checks,  was  to  pay  with  bank  notes  or  coin,  liven  large  payments 
were  often  made  by  bank  notes.  The  use  ot  checks  was,  and  is. 
a  thing  little  known  among  the  masses  of  the  people  in  France. 
Indeed,  the  "  woolen  sock,"  in  which  gold  itself,  rather  than  bank 
notes,  was  hoarded,  is  a  long  standing  tradition  in  I'rance,  and 
ha'-d  money,  rather  than  either  notes  or  deposits,  has  been  a  large 
factor  in  French  life.  r?ut  it  by  no  means  follows  from  this 
that  large  business  transactions,  and  stock  market  transactions, 
have  not  freely  availed  themselves  of  the  convenience  of  the 
checking  system.  To  a  verv  large  extent,  they  have  done  so.  No 
such  study  has  been  made  in  France  of  the  use  of  credit  instru- 
ments in  payments  as  that  which  has  been  made  in  this  country  by 
Dean  David  Kinley.'  One  can  only  rely  on  general  statements 
made  by  men  who  can  speak  authoritatively  from  first  hand 
knowledge  of  French  banking.  But  the  author,  on  the  basis 
of  such  information,  is  ([uite  confident  that  the  use  of  checks 
nas  l)een  ich  more  extensive  in  France  than  has  been 
geiierall}  :ed  in  Knglish  and  American  books  upon  the 
subject 

In  the  Liiited  States,  as  Kinley's  figures  show,  over  lt<t  per 
cent  of  all  t  'y'"^'"''^  are  made  by  check,  rather  than  coin  or 
paper  money.  Over  .10  per  cent  of  all  retail  payments  are  made 
by  check:  alxnit  HO  j)er  cent  of  wages  are  i)aid  by  check;  and 
over  '.Ml  per  ceiu  of  wholesale  business  is  ilone  by  check.  \o 
such  high  propoitions  could  be  found  for  wholesale,  retail  or 
wage  |)aynients  in  France.  But  Kinley's  figures  aUo  make  it 
clear  that  retail  and  wholcs.de  paytmnts  combined  consti- 
tute only  alwuit  one-fourth  of  the  payments  made  in  the  United 
.•states,  'ihe  bulk  of  our  paymeiUs  is  listed  in  his  figures  under 
tin.'  liead  of  "all  other,"  and  these  "all  other"  payments  are 
found,  on  analysis,  to  be  concentrated  in  the  great  centers  of 

'  I  he  I  St-  of  .l/.iii,-v  and  L'r,dit  htstruiiwnis  in  Payments  in  the  United 
Slates,  Natimial    Monetary   ^.onmli5^io^   Krport. 


W  KFl  KCTS   OK   THE  WAR   ON    MONEY,    <  KtDIT    AND   UANKING 

speculation  and  tinaiioe,  notalily  N'ew  York  City  itself.'  l'" ranee 
is  also  a  country  wlicre  financial  and  speculative  operations  are 
carried  on  (in  a  vast  scale,  and  ><e  men  who  carrv  them  on 
are  liy  iv  !iiean>.  ij^Mmrant  of  the  convenience  of  the  checking 
system 

In  tl  ccimd  place,  it  nnist  1k'  pointed  out  that  the  check  is  by 
no  means  the  only  in-trument  for  mobilizing  deposit  credits,  and 
niakini;  it  ixissihle  to  utilize  the  deposit  as  a  means  for  extending 
new  hank  credit,  h:  (iemiany,  where  also  it  has  been  supposed 
that  the  hank  note,  rather  than  the  deposit,  is  the  chief  means  of 
payment,  we  tind  the  "  ),nro  system,"  under  which  a  depositor 
instructs  his  bank  to  transfer  to  some  other  person,  perhaps  in  a 
ditTerent  city,  a  deposit  credit,  performing  a  service  similar  to 
the  checking  system.  It  is  dependent  in  part  on  branch  banking, 
although  it  can  k'  worked  out  through  independent  correspondent 
banks  as  well. 

In  r.MiT,  the  Banque  de  France  made  transfers  between  clients 
t(i  the  extent  nf  1  so  biliinn  francs."  The  Bancjue  de  France 
makes  transfers  all  over  France  for  the  government  for  its 
private  <lei)()sitors  and  for  the  other  banks  which  deposit  with  it. 
The  other  banks  will  commonly  make  transfers  between  branches 
in  a  given  city,  but  for  transfers  between  their  own  branches  in 
dillerent  cities  they  will  normally  use  the  machinery  of  the 
Hancjue  de  i'rance.'  Here,  then,  is  an  enormous  IkuIv  of 
l)aymetits  made  by  deposit  credit  by  a  method  which  is  (juite 
as  effective  as  the  check  for  the  purpose,  without  the  use  of 
checks. 

The  annual  income  of  the  peofjie  of  l-'rance  before  the  war  has 
t)een  estimated  at  about  thirty  billion  francs.*  The  total  annual 
retail  trade  of  the  country  must  Ite  substantially  less  than  that. 

'(  ;  ihi  prfMiit  writ.r's  l„lu,'  .1/  .l/„iicv.  Macmillaii,  1';I7,  cliap^  1,?  and 
V>.   i'<r  .111  .iiial>>i-  nf    Kiiiliv's  li^;llr^^, 

'  Naliuiial  .\l..iutar>  (  uiiiiiii^Mnii  Kipurt:  liil.ni,:,s  ,.11  ihc  liaiUiii,/  „nd 
(urr,-)uy  .SysU-ms  .'/  I:ii,il<iiul .  /kiik.-,  ,-Ic..  Siiiati'  I  liiotimciit  Xo  40<  (,1st 
(-on((.,  2<\  S( -^s..  |ia«tv  204  ..n,;  _'4() 

'To  a  rniisifUralil.  cMi-m,  lluvc  transfer-  lake  the  plarr  ..f  it.iniiKs 
amniii;  (lie  other  banks  ,-in  I  llu  ir  volume  exjiliin-  the  iii'^iKnificaiit  vnlumc 
of  .,|„Ta(iniK  ,.f  the  INr.v  .l.an-ir  l,nii,e  Ci  l'ilr..ii.  /(,;/./,  „/  Iraiuc. 
National   Monetary  (  omtni>.«i>iti   Kepnrt,  pace';  71  7^ 

'  IKIlferiih'v   e-tim:ite,   cuiiiteil   li>    l.aiiKlilni.   .'f.  ,1,'..  patft   194. 


FRANCE 


31 


In  America.  Kinley's  studies.'  referred  to  abow,  would  show  that 
wholesale  trade  is  about  twice  as  great  as  retail  trade,  in  pecuniary 
magnitude,  if  payments  arc  a  test.  If  this  should  l)e  true  also 
of  I'rance,  the  total  of  French  wholesale  and  retail  trade  before 
the  war  could  not  exceed  ninety  billion  francs  per  year  and 
hence  these  bank  transfers  would  Ije  double  the  total  wholesale 
and  retail  trade  of  France.  To  assume  that  the  five  billions 
of  bank  notes  in  F"rance  made  as  many  payments  as  the  180 
billions  of  transfers  made  by  the  Bancjue  de  France  alone  during 
the  year,  one  would  have  to  assume  that  the  bank  notes  have  a 
"  velocity  of  circulation  "  of  thirty-six  times  per  year.- 

Deposit  and  current  account  banking,  then,  is  obviously  a 
large  factor  in  France,  and  the  notion  that  notes  constitute  the 
chief  medium  of  payments  must  be  seriously  challenged.  That 
notes  and  coins  are  used  in  the  major  number  of  transactions  is 
doubtless  true.  It  would  probably  be  true  in  the  United  States. 
But  that  notes  and  coins  are  used  in  making  the  major  part, 
in  pecuniary  magnitude,  of  the  payments  in  France  is  probably 
untrue.  Transfers,  by  check  or  bank  transfers,  of  deposit  credits 
and  current  account  credits,  were  probably  quantitatively  greater 
than  note  payments  before  the  war. 

But  there  is  yet  another  highly  important,  even  though  unmeas- 
urable,  substitute  for  notes  and  coins  in  paymeiUs  in  I-iance, 
little  used  for  a  generation  in  the  United  States  (though  very 
important  here  two  generations  ag<i)  and  that  is  the  bill  of 
exchange  or  acceptance.  The  wholesaler,  sending  a  shipment  of 
goo(ls  to  a  retailer,  instead  of  receiving  a  check  or  cash  m  j)ay- 

'  I  his  comparisDii  is  rniiRh  .ind  imxact.  lartlv  bic.iusc  of  the  assumption 
lliat  thi-  |iroi)ortioiis  of  whulisalc  to  retail  trade  arc  the  same  fur  Franco 
a-  for  the  L'liited  Stales,  ami  |iartly  iKeause  of  uncertainty  as  to  the  rela- 
tion of  /•,iy.'".'i'.i  .*ii  frij(/,\  t  f.  I  i//iir  nf  Mciicy.  ehaps.  '\i  atul  V>  I'or 
the  purpose  in  hand,  however,  the  fiKures  n'vcn  do  not  understate  the  mag- 
nitudes of  whoUsale  and  n  lad  trade,  lieenisi-  the  whole  nati^m.-il  ineotne  is 
allowed  to  he  spent  at  retail,  and  heranse  it  is  assumed  th.it  paymi-nls  bear 
tlu'  s.inie  rel.iiloii  to  wholesale  trade  that  they  do  to  retail  trai'e.  In  f.ict, 
p.iynunt,  are  more  lil.ely  to  rijirisent  duplications,  speculations,  and  loans 
and  repa\nieiit>.  in  yvhnlesalc  than  in   letail  hiiMiicss. 

■' t  f.  the  slndlis  in  velocity  of  ciii  iiLiImn  of  Kitnnierir.  I'lsher  and  Pierre 
des  i'.ssar.  t'isher  ;>l:irrs  the  "velocity  of  inonev "  for  the  I'nited  States 
at  from  ninetem  to  Iwmtv-two  tnnc~  a  year.  Kemmerer's  estiinate  is  about 
twu-e  as  hitrh  losher  appears  to  me  to  b,-»ve'  made  the  better  estimite, 
thouKh  the  yvhole  problem  is  a  bafHiiiff  one. 


32        riFFncTS  or  thf.  war  ov  money,  crfdit  axo  banking 

ment,  draws  a  bill  on  the  retailer,  cither  "  at  sight  "  or  on  thirty, 
sixty  or  ninety  days'  time,  and  this  bill,  "  accepted  "  by  the 
retailer,  becomes  the  latter's  promise  to  pay.     It  may  then  be 

used  by  the  wholesaler  in  making  payments  to  some  one  else a 

practice  probably  more  common   in  Germany  than  in  France, 
and   mucli   more   common    with   "bank   acceptances"    (to   be 
described   in  a  moment)    than   with   "trade  acceptances"    (the 
transaction  just  described).     In  any  case,  tne  drawing  of  the 
bill,  and  the  accepting  of  the  bill,  in  themselves  constitute  final 
payment  for  the  goods.'     Frequently  the  wholesaler  will  draw, 
not  on  the  retailer  himself,  but  on  the  retailer's  bank,  and  the 
"acceptance"   of   the   retailer's   bank   makes   the   instrument   a 
•'  i)ank  acceptance."     In  the  figures  given  above  for  the  balance 
sheet  of  the  Credit   Lyonnais,   "acceptations"   appear  at    ISO 
million  francs— a  liability  of  the  bank,  much  of  it,  presumably, 
on  customers'  account.     .\n  acceptance  of  the  Credit  Lyonnais 
can  be  used  by  the  drawer  for  many  purposes.     He  can  discount 
it  with  his  banker,  and  get  a  deposit  credit,  or  bank  notes,  in 
return.     It  can  be  freely  rediscounted  by  the  banker  at  other 
prisate  banks,  or  at  the  Banque  de  France.     The  wholesaler 
himself,  if  a  depositor  with  the  Banque  de  France,  can  discount 
it  there.     Or,  the  wholesaler  may  use  it  directly  as  a  means  of 
paying  his  own  debts  to  other  business  men,  passing  it  on  at  the 
market  discount— a  discount  which  may  not  always  be  required. 
An  acceptance  by  a  well  known  bank,  with  only  'a  few  days  to 
run,  would  be  virtually  a  certified  check,  so  far  as  serving' as  a 
medium  of  exchange  is  concerned. 

Our  problem,  then,  ceases  to  l)e  quite  as  baffling  as  it  at  first 
appeared.  There  is  a  wide  extension  of  new  bank  credit  under 
the  deposit  system  in  i'rnnce.  Checks  are  used.  And  deposits 
can  be  made  mobile  without  them  by  bank  transfers.  The  bank 
acceptance,  and  even  the  trade  acceptance,  are  in  part  credit 
substitutes  for  n.ites  and  cash  as  media  of  exchange,  [n  addition 
to  the  uncovered   note   issue  .,f   the   Bat.(|ue  de   France,   there 

'  f)f    coufM.    the    hill    iisojf    lias    Mt    to   h.-    mwl       ThU    ^o,.    -  l     > 

no,...  ,>r    .  ch...k.     Mm   „„,.,,    .,.. -..'olmplish!;?,"  ,v  ,[n    ^ff'c^  in^Tl?'   '",;', 

'^.n'\:z;::i '''"""'  ^^^"^'  '-"''■  "^-^-^^ '-  koohJ  "Ji^;:!  ..mS 


FRANCE 


33 


is  a  very  substantial  body  of  real  bank  credit,  growing  out  of 
iiank  loans,  serving  as  the  counterpart  of  our  own  elastic  bank 
deposits. 

But  this  is  not  the  whole  story.  To  an  extent  that  is  almost 
incredible  at  first  blush  to  the  .American  student,  it  is  true  in 
France  that  "  deposits "  really  are  deposits  in  the  primitive 
sense — that  they  represent  real  savings  put  in  over  the  counter, 
in  the  form  of  coin,  bank  notes  and  credit  instruments,  which 
come  in  payment  of  net  income,  rather  than  as  part  of  the  gross 
income  of  che  active  business  man.  It  is  true  to  a  very  high 
degree  in  I' ranee  that  loans  grow  out  of  deposits,  rather  than 
that  deposits  (as  in  England  and  America)  grow  chiefly  out  of 
loans.  For  individual  banks,  or  even  communities,  this  is  often 
true  in  the  United  States.  There  is,  for  example,  a  bank  in 
Cambridge,  Massachusetts,  whose  depositors  include  few  impor- 
tant active  business  men.  The  retail  merchants  at  Harvard 
Scpiare  deposit  with  it,  but  for  the  most  part,  its  deposits  come 
from  students  and  teachers  of  Harvard  University,  and  from 
people  whose  incomes,  often  large,  are  chiefly  derived  from  stocks 
and  bonds  or  other  investments.  It  can  not  possibly  lend  all  its 
deposits  to  its  own  depositors.  It  goes  outside,  buys  commercial 
paper  from  other  cities,  lends  to  Boston  brokers  on  collateral 
security  who  are  not  among  its  depositors,  buys  securities,  etc. 
To  be  sure,  the  checks  deposited  with  it  would  not  be  nearly  so 
great  in  volume  if  other  banks,  in  other  places,  were  not  making 
loans.  It  is  part  of  a  larger  system  in  which  deposits  grow 
largely  out  of  loans.  But  by  and  large,  so  far  as  its  own 
balance  sheet  is  concerned,  its  loans  result  from  its  deposits, 
rather  than  the  reverse. 

Xtuv  IVance  occupied  before  the  war,  in  the  general  world 
credit  system,  much  the  positii»ii  of  this  Cambridge  bank  in  the 
general  h.-mkiug  system  of  the  larger  conununity.  The  deposit- 
ors of  French  banks  are  real  capitalists,  recipients  of  income 
frotn  which  they  save  substantial  amounts,  rather  tliaii  active 
business  men  who  rely  on  bank  accommodation  for  cirrying  on 
their  businesses.  The  French  are  notoriously  a  thrifty  people, 
and  their  surpluses  constantly  overflow  their  own  iMuindaries, 


34 


r.Fl-ECTS   OK   Tllli   WAR   ON    MONEY,    CREDIT    AND  BANKING 


Seeking  investment  aimjad.     In  France,  tlie  Iiankers  <Io  really 
lend  out  their  deposits,  instead  of  cliielly  creating  their  dejiMMts 
by  len(linj,r.     Indeed,  the  deposits  of  I'rench  hanks  in  general  are 
very  much  like  the  deposits  of  our  savings  banks.     The  active 
business  man  has  a  "  current  account,"  rather  than  a  deposit.     A 
careless  reading  of  the  balance  slieet  of  the  French  banks,  how- 
ever, might  lead  one  to  overestimate  the  relative  importance  of 
"  deposits  "  as  compared  .vitli  "  current  accounts."     In  .\merica. 
when  a  i)usiness  man  borrows  from  his  bank,  he  will  receive  a 
deposit  credit  for  the  whole  amount  covered  by  the  agreement, 
which  will  appear  as  a  liability  of  the  bank  in  its  balance  sheet. 
In  France,  under  the  "  current  account  "  system,  the  more  com- 
mon practice  will  be  for  no  entry  to  appear  in  the  bank's  books 
at  all  until  he  actually  draws  against  his  account,  and  he  will 
only  gradually  draw  the  whole  of  his  loan.     This  will  lead  to 
an  asset  item  on  the  bank's  books.     The  main  way  in  which 
current  accounts,  as  a  liability,  develop  on  the  bank's  books  will 
be  by  the  actual  depositing  of  items  coming  in  from  outside  the 
bank,  canceling  the  borrower's  indebtedness  and  building  up  a 
surplus  to  his  credit.     One  difference  between  the  two  systems, 
therefore,  is  that  the  French  method  leads  to  smaller  figures  oil 
the  bank's  balance  sheet  than  the  American  system,  for  a  given 
extension  of  credit,  and  that  the  importance  of  the  loan  and 
deposit  business  of  French  banks,  as  compared  witii  American 
banks,  is  not  adequately  presented  by  a  mere  comparison   of 
iialance  sheets.     The  difiference  is  largely  a  matter  of  form  and 
bookkeeping  methods.     The  economic  substance  is  not  altered 
thereby.     This  coiisideraton  does  not,  however,  remove  the  fact 
that  French  loan,  grow  chietly  out  of  tlie  capital  and  deposits  of 
the  banks,  instead  of  the  deposits  growing  out  of  the  hou<.. 

In  the  fact  tliat  tlie  I'rencii  in  general  deposit  more  tnan  the 
banks  lend  in  I'rance,  and  in  the  consequent  overflow  of  French 
funds  into  foreign  investments,  we  have  one  of  the  most  interest- 
ing and  distinctive  features  cf  the  whole  Frencli  svsteni.  In  the 
fate  of  these  foreign  investments  during  the  present  war,  we 
have  the  most  tragic  episode  in  the  whole  financial  chronicle  of 
the  war  period  in  France. 


FRANCE 


For  many  years  before  the  war,  the  French  banks  were  market- 
ing to  their  customers,  througii  their  numerous  branches,  enor- 
mous quantities  of  securities,  largely  foreign  securities.  It  is 
not  easy  to  get  exact  figures  of  the  extent  of  this,  but  that  a 
billion  and  a  half  francs  of  French  savings  were  in  one  form  or 
another  sent  abroad  in  an  ordinary  year  is  not  improbable.  This 
was  perhaps  two-thirds  to  three-fourths  of  the  total  annual 
savings  of  the  French  people.  To  an  ever  increasing  extent,  the 
outside  world  was  becoming  indebted  to  France.  Annual  pay- 
ments of  interest  and  dividends,  steadily  increasing,  turned  the 
balance  of  international  payments  more  and  more  in  favor  of 
France.  Part  of  this  France  took  in  the  form  of  gold,  and  the 
Banque  de  France  built  up  a  vast  gold  reserve.  This  gold 
reserve  stood  at  the  outbreak  of  the  war  at  over  four  billion 
francs.  I'artly  this  great  reserve  seems  to  have  been  built  up,  as 
a  matter  of  deliberate  policy,  as  a  war  chest.  From  is'.tt)  to  1!>10, 
the  Banque  de  France  increased  its  gold  reserve  by  75  per  cent, 
while  its  d'^counts  and  advances  increased  only  5  per  cent. 
Part  of  her  excess  foreign  credits  France  took  in  the  form  of 
goods — the  physical  "  balance  of  trade  "  was  regularly  "  against  " 
France,  which  means,  merely,  that  as  a  rich  capitalist  nation  she 
was  able  to  consume  more  than  she  produced  at  home.  But  a 
very  considerable  part  of  her  income  from  abroad  she  reinvested 
abroad,  adding  ever  to  her  creditor  position,  and  constantly 
increasing  the  back  flow  of  titles  to  goods  produced  by  (jther 
peoples.  In  her  huge  gold  reserve,  and  in  her  great  store  of 
claims  on  the  wealth  of  the  outside  world,  France  felt  herself 
well  ])rovide(l  against  the  war  which  she  feared  her  brutal  and 
arrogant  neighbor  was  preparing  to  force  upon  her.  She  could 
live  and  fight  upon  her  capital  accumulations.  Her  surplus,  if 
she  could  weather  the  military  shock,  would  enalilc  her  to  outlast 
her  formidable  opponent  economically.  It  .seemed  a  strong  posi- 
tion.    iVance  felt  secure. 

But  tlu'  position  had  its  weak  points,  which  French  critics,  to 
say  nothing  of  (iernian  and  iMiglisli  critics,  had  vigorously 
pointed  out  before  the  war.     Chief  among  these  French  critics 


3C  EFFECTS   OF  THE  WAR   OX    MONEY.    CREDIT   AND   BANKING 

was  the  re(loul)taI)le  Lysis— a  pseiulonyin  uliich  many  liave  sun- 
posed  represents  the  distinguished  eth'tor  „t  La  Pcruc  Jean 
Finot.  At  all  events,  Finot  stands  sponsor,  in  a  preface,  for  the 
hook  ■'  C  outre  r Oligarchic  finaucirrc  en  l-rancc"  '  which  first 
appeared  as  a  series  of  articles  in  La  Rcvuc,  running  from 
Xovemher  1.  ll.Oti.  t.,  November  i:.,  1!.()7.  The  i)ook  is  certainly 
written  by  an  ardent  patriot,  a  clear  thinker  and  a  man  wonder- 
fully well  m  formed  about  I-rench  money,  credit  and  banking 
It  hangs  together,  and  it  carries  conviction.  It  has  been  easy  to 
verify  many  of  its  contentions  by  conversations  with  English 
and  American  financiers  familiar  with  the  operations  oi  the 
French  banks,  and  in  every  way  friendlv  to  France.  Tiic  course 
ot  the  war  has  itself  been  a  sad  fulfilment  of  many  of  Lysis' 
apprehensions. 

Has  it  l)een  well  for  France  that  so  much  of  her  savings  were 
sent  abroad,  if  French  industry  was  therebv  starved  of  the 
capital  needed  for  its  development?  Was  France  better  ofT 
even  with  good  foreign  investments,  than  she  would  have  been 
with  a  strongly  developed  industry,  which  wouhl  have  enabled 
her  to  produce  within  her  own  borders  the  goods  she  Jieede.l  for 
the  war?  Is  it  well  with  a  nation  that  its  people  are  lar^elv 
capitalists  and  agriculturalists,  instead  of  active  cntrcprrm-ms 
and  factory  laborers,  when  a  great  war  comes? 

It  will  not  serve  to  answer  tl.  A  capital  seeks  the  best  market 
that  the  thing  is  settled  by  impersonal  economic  law.  That  would 
be  true  in  a  country  where  banking  is  decentralized,  and  where 
many  competitive  agencies  are  offering  investments  to  the  people 
But  in  I- ranee  the  decision  has  been  ma.ie  by  a  few  great  private 
banks,  on  whose  judgment  their  numerous  depositors  almost 
wholly  rel.e<l.  And  these  great  ,,rivate  banks,  nominally  com- 
petitors, have  in  fact  been  closely  ass<.ciate(I.  following  a  com- 
mon policy,  and  often  sharing  openly  in  the  same  marketing 
operations.  ^ 


Douziemc    r-"t|itinri.    V, 
Kan" 

steh 
1911 


uouziemc    htl.tmri.    Paris.   1908.     Aux    FiurciuN   <lf   / ,.   A>  ■-,„  •      s;         i 


FRANCE 


37 


Officials  of  the  Credit  Lyonnais,  testifying  before  the  Ameri- 
can National  Monetary  Commission,  had  this  to  say : 

A.  There  are  two  kinds  of  smh  operations;  first  when  the  Credit  Lyonnais 
is  alone  uiterestcd  in  the  operation  ;  and  secomi,  when  cithers  of  the  I'aris 
hankers  are  interesteil  with  n^.  The  large^t  reeuit  issue,  in  connection  with 
other  hankers,  was  the  five  per  cent  Uussi.in  loan  of  1906  of  1,200,000,000 
francs.  What  is  very  important  in  our  w  ly  '  f  floating  a  loan  is  that  the 
sales  are  made  in  small  (juantitie^  ;  the  transaction  is  comnU'ed  in  a  very 
few  days,  and  each  of  our  cnsto'  rs  hnys  oidy  the  iiumher  of  bonds  cor- 
respondrng  to  his  investment  rei|uirement. 

Q.    As  a  matter  of  fact,  anything  you  recommend  they  will  buy? 

A.  ^'e^,  and  even  with  a  very  large  issu,  ,  the  bonds  do  not  remain  long 
in  the  market,  because  in  our  country  savings  are  very  extended,  Every- 
one saves  his  money.  The  small  savings  of  France  are  the  wealth  of  the 
country.  Hy  examining  the  balances  of  accounts  of  our  customers  we  can 
know  whether  the;  w.->nt  to  invest  or  not,  and  then  we  endeavor  to  have 
stocks  and  bonds  to  offer  them  as  they  require  them;  hut  that  is  variable, 
and  sometimes  we  might  have  a  large  issue,  forty  or  fifty  million  francs, 
taken  up  by  the  public  in  a  few  days.' 

In  reply  to  further  ([uestions,  it  developed  that  the  French 
banks  are  nnich  like  bnnd  houses  in  America,  and  handle  virtu- 
ally all  the  security  business  of  France.  Most  of  their  o])era- 
tions  are  in  securities  which  they  sell  on  commission,  rather  than 
in  securities  they  own.  When  asked  as  to  the  amount  of  the 
commission,  the  only  information  they  vouchsafed  was:  "  Nat- 
urally the  commission  varies."  - 

Lysis  supplies  more  detailed  information  regarding  the  com- 
missions. \jn  the  sOO  million  franc  issue  of  Russian  5  per 
cent  Treasury  notes  of  r.t()4,  the  margin  was  10  per  cent.  On 
the  <;■_'. r)(t(»,000  franc  issue  of  Morocco  in  the  same  year,  the 
profit  was  at  least  IS'i  |K-r  cent.  The  profit  is  rarely  less  than 
r.  per  cent  of  the  selling  price  of  the  issues.''  The  Russian  5 
per  cents  of  I'.tOO,  the  enormous  issue  which  was  mentioned  ir. 
the  testimony  of  the  Credit  Lyomiais  above,  and  whose  fortunes 
during  the  war  we  shall  follow  in  later  pages,  was  sold  at  a 
profit  of  over  7  per  cent.     The  Russian  Ciovernment  received 

'  .National   Monetary   Commission   Report,  Senate  Document   No.  -lOS,  61st 
Cong..  2d  Sess..  page  23i. 
'  Ibid.,  page  234. 
'  Lysis,  o/>.  cit.,  pages  24-31. 


3S  EFFECTS  OF  THE  WAR  OX   MONEY,   CREDIT  AND  BANKIXG 

eighty-tlirec  for  a  bond  which  the  lianks  sold  the  people  at 
eifjhty-eijjht.  But  the  Kiissian  Government  received  only  eighty- 
two  in  reality,  since  it  had  to  pay  1  per  cent  of  the  par  value  as 
a  further  commission  to  an  intermediary  of  the  banks!  ' 

Doubtless  it  may  be  urged  that  selling  expenses  are  high.    They 
are.    They  include  a  good  many  services  which  the  banks  through 
their  numerous  branches  perform  gratis   for  their  customers. 
They  mclude  elaborate  marketing  campaigns.     They  include,  as 
an  American  banker  who  has  had  dealings  with  French  bankers 
HI  this  connection  states,  not  merely  advertising  charges  in  the 
press,  but  also,  quite  frankly,  in  one  case  at  least,  subsidies  to 
the  press.     The  selling  costs  are  high— but  need  c(xsts  be  sf)  high 
tor  good  .securities?     London  can  do  the  thing  more  cheaply. 
New  York,  despite  past  scandals  in  connection  with  underwrit- 
ing operations,   does  the  thing  more  cheaply.      There  can   be 
httle  d<,ubt  that   in  many  of  these  operati..ns  French  bankers 
have  <hown  themselves  greedy  to  a  marked  degree,  and  that 
the  greed   ha^  been  largely  at   the  expense  of  their  confiding 
clients.  ^ 

The  direction  of  French  investment,  then,  has  been  subject, 
not  to  the  free  movement  of  capital,  sent  piecemeal,  under  com- 
petitive conditions,  by  alert  individual  investors,  to  those  lines 
of  investment  which  promised  the  best  yield  for  a  given  degree 
of  safety,  but  has  been  controlled  by  a  few  great  banks,  working 
to  a  large  degree  in  harmony,  acting  for  a  passive  body  of 
depositors,  and  controlling  public  opinion  through  the  press. 
In  choosing  the  investments,  these  bankers  have  in  no  small 
degree  been  moved  by  the  fact  that  certain  lines  of  investment 
gave  them  higher  commissions  than  others.  But  the  securities 
whose  necessitous  sellers  will  pay  high  commissions  for  are  not 
the  ones  which  a  great  investing  people  find  it  best  to  hold  when 
tilt'  evil  days  come! 

What  has  been  the  direction  of  French  investment?    To  a  very 
large  degree,  the  issues  of  second  rate  foreign  governments.' 


'  I.ysi«.  np.  fil..  pages  48-49,  note. 

■"  /bid.,  fassiiii.    London  Ecoitomist.  Sufplcmcnt.  December,  1914,  page  8. 


FRANCE 


39 


Russian  securities  have  been  Ijought  in  enormous  quantities. 
Bulgarian  state  issues  have  been  bought  in  large  amounts. 
Brazilian  issues,  not  alone  of  the  central  government,  but  even 
of  the  municipalities,  have  been  largely  bought.'  These  were  a 
poor  rescjurce  for  France  when  the  great  war  came!  Brazil, 
dependent  largely  on  the  price  of  a  single  commodity,  coffee,  for 
its  public  revenues,  was  not  in  a  happy  condition  when  the  price 
of  coffee  dropped  from  a  high  of  fourteen  cents  in  11»13  to  a  low 
of  'I'-y^  cents  in  March,  li»14!  Nor  did  extensive  agricultural 
loans  in  Belgium  and  Austria,  for  which  the  banks  are  little 
responsible,  prove  to  be  the  happiest  source  from  which  to  se- 
cure funds  quickly  when  emergencies  arose. 

In  part,  evils  of  this  sort  are  found  in  every  country.  No 
great  money  market  can  feel  itself  wholly  virtuous  when  scandals 
of  this  sort  are  mentioned.  But  the  evils  have  been  accentuated 
in  France,  in  no  small  part  by  virtue  of  the  very  centralization  of 
banking,  the  extensive  development  of  branch  banking  and  the 
disappearance  of  the  local  independent  banker,  who  was  inter- 
ested in  local  industry,  in  touch  with  local  needs,  and  who  pre- 
ferred to  put  funds  where  he  could  watch  them,  at  home.  The 
deliberate  policy  of  many  French  banks — openly  avowed  by  the 
Credit  Lyonnais  - — of  keeping  local  men  out  of  the  branches, 
accentuates  this.  The  investment  of  banking  funds  in  local 
commerce  and  industry  requires  watchfulness  and  local  knowl- 
edge, as  well  as  initiative  on  the  part  of  the  local  banker. 
Branch  banking  can  n(jt  be  recommended  to  America  on  the 
basis  of  French  experience.  Very  much  of  our  vigor  and  eco- 
nomic progress  must  be  attributed  to  our  many  thousands  of 
independent  local  banks. 

Of  course  there  are  other  factors.  France  is  a  static  country 
from  other  causes.    The  population,  already  relatively  dense,  has 


'  Professor  O.  M.  W.  Sprague  states  that  the  French  bankers  have  the 
tradition  that  securities  backed  by  the  taxiiif;  power,  even  of  an  inferior 
K'nerninent,  are  much  superior  to  any  industrial  securities.  For  Professor 
Sprague's  general  endorsement  of  the  criticism  of  French  banking  here 
given,  see  American  Economic  Kevierv.  March,  1912,  pages  126-129. 
_'  Interviews  on  the  Banking  and  Currency  Systems  of  England.  France,  etc., 
Natiiiiial  Monetary  Commission  Report,  Senate  Document  405,  61st  Cong., 
2d  Sess.,  page  246. 


40 


EFFKCTS  OF   TIIF   WAR   ON    MONKY,    CRKDIT   AN'D   HANKING 


not  l)een  increasing.  The  people  are  by  iradition  conservative  in 
economic  matters.  Canada  iias  not  fcimd  that  branch  banking 
has  stifled  her  rapid  expansion.  Canada  borrows  from  her 
banks,  instead  of  investing  tlirough  them.  Her  people  are  will- 
ing to  take  chances,  believing  in  the  resources  of  an  undeveloped 
country.  The  French  investor  has  come  to  feel  that  only  con- 
servative securities  should  lie  Itought.  It  is  not  wholly  the  fault 
of  the  b>ench  banker  that  wlicn  he  buys  securities  which  yield 
7  and  >  ])er  cent,  he  markets  them  to  his  people  to  yield 
4  or  ."i  per  cent.  Tiie  I'rench  investor  would  distrust  a 
security  tliat  yielded  more  than  .">  j)er  cent.  He  prefers  a  safe 
Russian  state  issue,  yielding  I'-  per  cent,  to  a  French  industrial 
security  yielding  •!.  He  is  like  the  .\'ew  F.ngland  investor  who 
bought  Xew  Haven  because  the  yield  was  so  low  that  it  must 
be  >afe! 

P.ranch  banking  in  a  country  which  has  little  capital  can 
e.\i>t  only  if  it  makes  real  credit  extensions  in  the  localities 
wiiere  tlie  branches  are  found.  I>ut  in  a  coimtry  like  {"ranee, 
where  surplus  capital  e.\is»s  in  abunda"ce,  and  where  the  banks 
are  primarily  investing  agencies  for  their  depositors,  branch 
banking,  carried  far.  is  almost  certain  to  be  ])ernicious.  The 
jiolicy  mu>t  be  worked  out  by  a  Muall  set  of  men  in  Paris.  The 
ioan>  eiuru^ted  to  the  discretion  of  branch  officials  nnist  be 
mechanic.illy  made,  imder  the  safeguanl  of  rigid  formulae.  They 
are.  In  l'ari>  great  linancial  operations  are  i)Ianned  and  executed. 
r.ut  in  tile  t)ranches  the  oi)erations  are  chielly  conlined  to  two 
thing"-:  (1)  selling  to  eusiomer>  the  securities'  selected  and 
recommended  by  the  cetUr.il  oliice:  (-)  making  the  safest  kind 
of  discouiU>  on  short  term  eoinniercial  bilK.  Irencii  banks  are 
lo.ith  to  take  tu;muiacturer>'  pajier.  They  are  wholly  unwilling 
to  act  as  "sleeping  p.irtner  "  in  a  manufacturing  eiUerprise 
{(■.niniiiiiKliti- ).  ( ierman  bank>  will  finance  a  manufacturing 
e.Mablishment,  ]>ut  a  bank  official  on  its  board,  and  give  it  every 
assistance.  They  will  buy  its  .securities  outright,  and  hiild  thein 
as  regular  investments  of  the  bank.     .American  bankers  com- 


'  I.y«is  sLitcs  ili.it  promniinii  and  salary   for  officials  in  tfic  lir.nnrlirs  de- 
pend rtiiefiy  on  their  success  in  markctiiiR  securities.     Of.  cit.,  paffc  31. 


FRANCE 


41 


monly  do  not  buy  the  securities  of  small  manufacturing  corpora- 
tions, but  they  do  lend  to  them  heavily,  often  for  the  purchase  of 
fixed  capital,  and  give  them  a  great  deal  of  supervision  and 
advice.  In  France  the  local  independent  banks  and  the  provincial 
banks  with  branches  have  done  this,  but  the  great  credit  houses 
which  dominate  French  banking  refuse  to  do  it.  Within  France, 
in  the  matter  of  loans  and  discounts,  they  play  the  safest  sort  of 
game.  Some  short  time  industrial  paper  they  will  take,  covering 
a  small  part  of  the  circulating  capital  of  a  manufacturer  (work 
in  process,  raw  materials),  but  chiefly  they  insist  on  true  com- 
mercial paper,  growing  out  of  the  actual  movement  of  goods. 
I-:ven  mercantile  credit  is  extended  grudgingly.  "  Our  theory  is 
that  every  merchant  ought  to  have  capital  enough  to  go  on  by 
himself  in  normal  times,  but  there  are  times  in  the  busy  season- 
say  three  or  four  months — when  he  will  need  more  capital,  and 
then  he  comes  to  us  and  we  lend  him  money  under  this  item 
[iomptfs  coitrants]."  '  No  doubt  the  German  banks  have  over- 
done this  matter  of  financing  manufacturers,  and  their  assets 
were  not  as  liquid  as  bankers'  assets  ought  to  be.  But  the  French 
bankers  in  their  extreme  conservatism  have  gone  to  absurd 
lengths  in  the  other  direction,  while  taking  wild  risks  for  their 
customers  in  investments  outside  of  l-rance.-'  Part  of  it.  no  doubt, 
is  ti)  be  explained  by  the  simi)le  consideration  that  it  is  easier  for 
a  small  group  of  busy  gentlemen  to  give  attention  to  the  annual 
budgets  of  foreign  states,  involving  millions  and  billions  of 
f  nics  at  a  time,  once  a  year,  than  to  watch  piecemeal  weekly 
and  monthly  details  of  many  smaller  businesses  scattered 
throughout  IVancc.  The  financing  of  industry  recjuircs  care, 
attention,  discrimination.  lUit  strict  commercial  banking  based 
on  d<  cumentary  bills  can  be  trusted  to  subordinates  untler  rule 
of  thiinfn. 

i'rencii  banks  hold  very  much  short  time  paper  of  foreign 
bank^.  Tliy  lend  to  the  New  Orleans  banks  to  help  mnve  the 
coltnn  crop.  They  were,  tlown  to  IJ'll,  lending  a  great  deal  to 
(ierman    banks,    which   etial)led    the    (iennan    banks   to    fmaiicc 

'  Sl.iit'tmiU  In  Credit  Lyi  imais.  in  litliivii-tiS  on  ill,-  llanl^iiiii  and  Cur- 
rem  V  .Vv.Wi-m.!  ,'f  /Ji<;/riitrf.  I  r,iiiii\  I'/i..  lor    cil..  \y.\u,<   -'1 

'  Loii(ioii  liconiimist.  Siipplcnietit,  Dcct-mlHT  19,   1914.  pagt  8. 


!l3( 


ft: 

lie. 

k. 

US' 


42  EKI-ECTS  OF  Tin-:  WAR  ON    MONEY.   CREDIT   AND  BANKING 

German  industry  more  generously,  and  led  to  the  building  of 
factories  in  Ge*- nany  which  could  not  otherwise  have  been  built, 
wliich  (icrmany  has  turned  to  good  account  in  the  present  war. 
\\  lien  I'rance  recalled  these  loans  at  the  time  of  the  Morocco 
troul)ie  in  liHl,  Germany  was  financially  embarrassed — but  the 
l)hysical  factories  and  equipment  remained  on  (iernian  soil !  Had 
France  continued  the  practice  till  1!>14,  Germany  would  not  have 
been  even  financially  embarrassed  by  a  I-Vench  effort  to 
recall  the  loans — she  would  simply  not  have  paid  them ! ' 

It  is  proper  to  call  attention  to  the  fact  that  the  Banque  de 
France  itself  has  been  free  from  responsibility  for  these  foreign 
investments.  It  has  been  a  high  minded  public  institution.  It 
has  limited  its  profits  greatly  by  its  huge  gold  accumulation.  It 
has  properly  limited  its  assets  to  licjuid  items  (including  short 
loans  on  collateral  security  of  specified  types  to  the  bourse).  It 
has  retained  at  every  step  the  confi.lence  of  the  French  people. 
Indeed,  one  of  the  severest  arraignments  of  the  great  credit 
iiouses  in  France  for  their  policy  of  .sending  away  I'rench  capital 
and  starving  I'rench  inilustry  came  recently,  in  a  debate  over  the 
renewal  of  the  Bantjue's  privilege  in  the  French  Chami)er  of 
Deputies,  from  a  leading  defender  uf  the  Banque  de  France,  M. 
Candace.  i:arly  in  July,  I'.Un,  M.  Candace  reiterated  virtually  all 
of  Lysis*  main  contentions.'' 

'  Thi  writer  vtiitiirts  to  rcfir  litre  to  his  discussion  cif  thr  policy  of  r.iig- 
Ii>-li,  American  and  (ierman  banks  in  the  financiiiK  of  industry,  in  the  chapter 
on    "Dank  .\^set^  and   Hank   keserves  "  of  his  I'aluc  of  Money. 

'  London  Lconuimst,  July  \.\  1918,  page  42. 


CHAPTER  III 
The  Outbreak  of  the  War  in  France 

This  long  discussi(jn  of  French  banking  Ijelore  the  war  has 
been  necessary  for  an  understanding  of  the  course  of  events 
since  the  war  began.  And  it  has  ijeeii  particularly  necessary 
since  much  of  what  has  been  written  in  America  about  French 
banking  has  been  based  on  an  uncritical  acceptance  of  the 
encomiums  which  much  of  French  financial  literature  has  for 
decades  been  pronouncing  upon  the  French  system.  .\s  regards 
the  Banque  de  France,  these  encomiums  have  l)ecn  deserved.  But 
serious  reservations  must  be  made  for  not  a  few  of  the  great 
credit  houses. 

For  two  years  before  the  war  France  had  l)een  suffering  from 
depression.'  growing  in  no  small  part  out  of  the  general  policies 
which  we  have  Ijeen  discussing.  French  industry  was  languish- 
ing. The  bourse  was  sagging  and  breaking  under  the  discovery 
that  many  of  the  foreign  loans  were  precarious.  The  Balkan 
wars  had  weakened  the  market  in  Balkan  securities  an<l  had  led 
to  further  apprehensions  of  war.  The  state  too  had  had  its 
share  in  bringing  about  the  depression.  The  French  Ciovernment. 
under  the  influence  of  radical  parties,  had  Iwen  increasing  its 
budget  rapidly,  and  the  pul)lic  debt  was  very  heavy — well  over 
thirty  billion  francs — five  times  that  of  (krmany  and  twice  that 
of  Fngland."  (This  comparison  is  unduly  favt)rable  to  Clermany, 
since  tJernian  municipalities,  especially  the  smaller  cities,  had 
much  heavier  debt  burdens  than  French  municipalities. )  ''  Fur- 
ther, there  was  great  political  instability  throughnut  the  first  half 
of  I'.tH.  Ministries  were  dissolving  frequently.  The  i)as.sage  of 
the  budget  was  delayed  long  l)ey<jnd  the  normal  time.  The  railical 

'  lomloii  Lccniimisl.  AuKU>t  15,  l'»14,  pam-  32\  :  ibid..  SupplfiiK'nl,  Dccim- 
l.ir  IV.  1914;  iM..  lunc  1.?,  1914.  pam  1444;  ihid.,  July  18,  1914,  pam-  125. 
/)iV  Kiiiik.  JuiH'.  1914.  paKf  70J.  l.aiiRliliii,  J.  I..:  Cridii  of  the  Wiliont, 
.\rw  Ncrk,  1918.  page  156. 

■  LaiiRhlm,  of.  (I/,,  p.   155. 

•  Vide  bit  Bank,  Septembtr,  1914.  page  895. 

48 


44  EFFECTS  OF   THE  WAR  ON    MONEY,   CREDIT   AM)   BANKING 

parties  were  insisting  on  Ijringing  in  the  dreaded  income  tax, 
and  additional  taxes  on  securities,  as  a  means  of  financing  new 
social  legislation  without  further  reliance  on  ])ul)lic  loans.  It  is 
n(^t  easy  for  an  American  or  F.nglish  student  to  understand  how 
dreadful  this  proposal  appeared  to  the  more  conservative  elements 
in  IVance.  But  one  who  will  run  through  the  editorials  of  Paul 
Leroy-I'eaulieu  in  the  Economistc  I'rani^ais  for  the  first  half  of 
1!U4  may  well  get  the  impression  that  the  end  of  the  world  was 
at  hand.  At  all  events,  fear  of  ta.xes  v  as  clearly  a  great  factor 
in  the  depression,  and  it  is  well  to  understand  this  attitude  in 
evaluating  French  financial  policies  during  the  war  period  which 
follows. 

On  July  1,  1!»U,  there  were  only  1-Ui  blast  furnaces  in  opera- 
tion in  France.  Fifty  furnaces  were  shut  down.'  Manufacturing 
output  in  many  lines  was  curtailed.  The  weather  in  July  was 
causing  serious  apprehensions  regarding  the  crops.  The  Balkan 
.tate  securities  had  fallen  on  the  bourse.  The  March.  ]:U4, 
option  in  ci)tTee  in  Xew  York  \A\  to  a  low  of  $.0,j7tt  per  pound, 
while  similar  prices  prevailed  at  Havre  (as  a:,iinst  a  range  of 
frnm  sK  to  W  cents  in  r.M;i).  This,  with  other  ditificulties, 
precipitated  a  crisis  in  Brazil,  with  great  weakness  in  Brazilians 
on  the  Paris  lH)urse,  and  tiiere  was  weakness  in  Argentine  securi- 
ties as  well.  Mexican  investments  were  held  largely  in  France, 
and  Mexico  was  in  chacis.  Late  in  May  and  early  in  June, 
largely  a>  a  c<)nse(|uence  of  the  weakness  of  these  securities,  tho.se 
banking  houses  which  had  been  mi)>t  responsible  f<pr  them  were 
in  seri<ius  troubles.  Runs  were  started.  The  Societe  (ienerale 
was  hardest  hit.  though  .some  other  houses  were  also  affected. 
W  ild  ruiu.irs  were  going  about.  In  this  situation,  the  Societe 
(leiiirale  took  tlie  mi])rcrf.lented  step  of  asking  the  IJanciue  dc 
F'rance  to  send  its  .uioiuu.mts  to  go  over  the  imrtfolio  of  the 
Societe  ( li'iUTale.  This  was  done,  and  a  reassuring  st.itement  was 
made  by  the  Banijue  de  I  r.iiuH',  v, huh  s|.,jiped  the  runs.-  ( lerinan 
'  l.iiMiloii  /.\n)i,.(in,i(.  .\iiKii»t  1.  VAX.  iMKr  JU. 

■  Ihc  lUiiU-.  June,  ]')\A.  |,,ij;f  ;iM,  Lnmlim  lu-.'ii.,,inst.  Jiiiu-  1,!.  1"»U.  y.iu^- 
1444  Nil  SiicKli  (iriuralc  m  iil  (nii  ,i  lircular  Idtir,  in  liiin.  l'M4,  >tatMiK 
til  it  In  na'nn  of  thr  i-'lpim-u^  whirli  IkkI  licti  ■  i.rc-ul  alimail  nb'iit  lliom. 
tln\  li.i(|  ri'iticMol  till  Vltni-icrs  nf  ri'ami'  tn  ask  tin-  l!uii|in'  ilc  France 
til  1  vanni  <  tluir  .i.t.inniN  Tlii'  Icltir  innlains  tlic  rta^siirinR  statrincnt 
liy  thr  natiqiic  dc  Trance. 


II 

=1,1 


FRANCE 


45 


bankers  took  a  ribald  joy  in  this  episode,  recalling  a  similar  occa- 
sion in  rJll,  when  the  Reichsbank  had  had  to  pertonn  a  similar 
service  tor  certain  of  the  German  houses !  Bank  shares  in  France 
were  very  weak  during  this  episode  and  continued  weak,  suffer- 
ing heavily  in  the  (juasi-collapsc  that  came  in  the  middle  of  July, 
when  the  storm  clouds  began  to  threaten.  The  shares  of  one 
great  credit  house  dropped  one  hundred  francs  in  a  single  day. 
Covcrnment  securities  were  also  very  weak,  partimlarly  the  new 
'•)M  per  cents  just  issued,  (in  which  only  a  small  instalment  had 
been  paid.  These  dropped  ominously  in  July,  as  much  as  l.,')() 
francs  (in  the  hundred  (to  8t>.(i2 )  in  one  day.'  Throughout  July, 
to  the  outbreak  of  the  war,  the  lK)urse  continued  to  break,  and 
losses  were  enormous  when  the  moratorium  (which  we  shall  later 
discuss)  was  finally  jjroclaimed. 

Such  was  the  financial  situation  with  which  France  entered 
upon  the  great  war.  Hut  tliere  was  another  side.  The  Banque 
de  France  itself  had  unshakable  prestige.  The  French  people, 
willing  enough  to  ([uarrel  bitterly  over  internal  prolilems,  and 
even  divided  fundamentally  over  the  very  foundations  of  the 
economic  organization  of  society — for  l-rench  radicalism  goes 
deep,  and  the  I'rench  socialist  is  often  reckoned  a  conservative 
by  the  real  radicals  in  France! — were  none  the  less  prepared, 
despite  German  iiurigue  and  occasional  French  traitors,  to  rally 
loyally  to  meet  the  nation's  extreme  danger.  The  very  crisis 
and  depression  meant  that  France  hail  unusual  supplies  of 
hoarded  funds,  gold  and  bank  notes,  ready  for  the  purchase  of 
the  short  term  obligations  which  the  government  early  began  to 
i>sue.  In  times  of  crisis  and  depression  inves^tors  hold  ofT,  wait- 
ing for  better  days,  and  in  France  the  "  woolen  sock  "  was  unusu- 
ally full  in  July  and  .\ugus..  1!»14.  The  initial  burden  of  war 
finance  fell  chietly  on  the  Banque  de  1 'ranee  itself.  Tlie  great 
credit  houses  played  a  sorry  nMe  at  the  beginning  of  the  war, 
lliougli  tlicy  ha\o  to  some  extent  redeemed  themselves  in  the 
later  part>  of  it. 

The  first  shock  of  tlie  war  in  I'aris,  as  in  London  and  Xew 
York,  was   fell  on  tiie  bourse.     As  long  as  trading  was  per- 

'  London  lUonomisI,  Julj  J.S,  1914.  page  175. 


40 


EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND  BANKING 


initteil,  frightened  sellers  sought  to  turn  their  securities  into 
ready  money  at  wiiatevcr  price  tliey  would  bring.  '1  "he  phenom- 
enon was  worldwide,  and  it  will  Ik-  more  convenient  to  describe 
many  of  the  international  phases  of  it  in  connection  with  our 
account  of  New  York.  Xo  great  stock  market  can  l)e  weak- 
ened without  affecting  the  others.  For  one  thing,  many 
securities  are  listed  on  more  than  one  market  and  some  of  them 
on  many  markets.  Selling  in  these  securities,  starting  in  one 
market,  (juickly  spreads  through  the  action  of  arl>itraging 
brokers  to  (^hcrs  where  the  prices  have  not  yet  been  broken. 
Brokers  in  all  great  markets  have  a  network  of  credit  relations 
with  brokers  in  other  markets,  and  if  a  selling  wave  in  any  market 
goes  so  far  as  seriously  to  jeopard  margins,  weakness  manifests 
itself  in  other  markets,  and  in  other  securities,  as  banks,  uncer- 
tain as  to  the  solvency  of  the  brokers,  call  on  them  for  larger 
margins,  which  leads  them  to  call  on  their  customers  for  more 
margins,  which  leads  their  customers  to  lighten  the  load  of 
securities  they  are  carrying,  with  a  consequent  decline  in  prices. 

Part  of  the  weakness  of  the  Paris  bourse  through  July  was  due 
to  weakness  in  Vienna,  in  Berlin,  in  Amsterdam  and  other 
centers.  Vienna  appears  to  have  felt  the  shock  of  approaching 
war  first,  a  fall  of  from  10  to  12  per  cent  in  stocks  taking 
l)lace  there  on  July  i:5,  preceded  by  four  iK'ar  days  beginning  with 
July  :.'.  Paris  had  troubles  enough  of  its  own  before  this,  but 
seems  not  to  have  taken  the  assassination  of  the  Austrian  Crown 
Prince  at  Sarajevo  on  June  2N  very  seriously.  From  the  very 
moment  that  this  occurred,  \'ienna  was  disturbed.'  In  France, 
on  the  other  hand,  there  appears  to  have  been  little  more  than  a 
recognition  that  tiie  situation  called  for  tact  and  decorum.  M. 
Paul  I.eroy-Beaulieu,  in  the  issue  of  the  Eco^'^niistc  I'ran(ais 
next  following  the  assassination,  gives  editorial  expression  of 
sympathy  for  .Austria  and  her  venerable  ruler  with  a  degree 
of  courtesy  and  diplomacy  that  makes  one  feel  that  he  was  per- 


'  Tlic  as>assiiiatii>n  occurred  mi  Suml.iv  .iiul  l!ii  Mmiday  fnllowiiiw  w.is 
a  holiday  in  Austria.  Hy  Tuesday  a  panic  had  lurii  avcrtcci  nn  the  hoursc. 
Milt  between  July  2  and  1.?  there  were  four  day-  of  very  heavy  selling. 
Cf.  London  r.ci'Hi'misl.  fiireiRn  correspondence,  .\ustrialuinp.iry.  Ciermany 
and  France,  for  July,  1914. 


FRANCE 


4T 


forming  an  official  duty.  But  French  financial  papers  continued 
for  a  tune  the  discussion  ot  their  local  problems,  particularly 
the  new  taxation  on  securities  and  incomes,  and  the  causes  other 
than  Sarajevo  affecting  the  bourse.  On  July  I'O  Vienna  had  a 
further  heavy  decline  in  stocks.  It  was  July  2:J  before  Paris  and 
Berlin  had  their  real  war  panic  in  the  stock  markets.  There  had 
meanwhile  Ijeen  retlexes  in  the  stock  exchanges  in  London  and 
New  York.  By  July  2'>  selling  in  both  markets,  on  foreign 
account,  was  very  heavy.  On  July  27  the  X'ienna  exchange  was 
closed.  The  next  day  Austria  declared  war  on  Serbia.  Bourses 
were  closed  on  July  2S  in  Montreal,  Toronto  and  Madrid.  On 
July  29  the  Berlin  Iwurse  discontinued  quotations.  By  July  30 
the  panic  had  reached  London  and  bourses  were  closed  in  St. 
Petersburg  and  in  all  South  .Vmerican  countries.  The  Coulisse 
(curb  market)  was  closed  in  Paris  on  that  day.  On  the  same 
day  the  Parquet,  the  official  bourse  in  Paris,  virtually  sus- 
pended selling,  although  it  was  not  officially  closed  till  September 
3,  when  the  French  Government  witlidrew  from  Paris  to  Bor- 
deaux. On  July  31  the  London  stock  exchange  was  closed  and 
a  few  hours  later  on  the  same  day,  four  minutes  before  time  for 
opening  the  Xew  York  stock  exchange,  the  authorities  of  that 
institution  announced  to  the  anxious  brokers  that  it  would  not 
open.  Enormous  selling  orders  from  Europe  and  from  fright- 
ened Americans  had  accumulated  in  their  hands  overnight,  selling 
orders  "at  the  market"  (meaning  at  any  price  whatever),  the 
"  bears  "  had  already  covered  their  short  sales,  aiid  it  was  clear 
that  Xew  York  alone  could  not  stand  the  strain  of  the  concen- 
trated selling  of  a  frightened  world.  On  .August  1.  Germany 
declared  war  on  Russia,  and  late  at  night  on  August  4,  England 
declared  war  on  (jermany. 

The  decline  in  jjrices  on  the  Paris  bourse  was  very  great. 
From  July  ;t(t  to  December  7.  when  the  Ixjurse  was  reopened,  tor 
cash  trading  only,  in  Paris,  it  is  very  difficult  to  get  quotations 
that  mean  much.  .After  the  bourse  was  officially  closed  on 
September  3,  (juotatioiis  on  the  bourse  of  Bordeaux,  and  even  the 
Lyons  bourse,  give  some  index  of  conditions,  but  neither  these 
markets,  nor  the  market  at  Paris  between  July  30  and  December 


48  KFFKCT.S  OF  THE   WAR  OX    MONEY,    CREDIT   AND  BANKING 

7,  rcprescntfil  a  larj^e  enough  volume  of  transactions  to  be 
really  sigtiit'icant.  The  following  I'aiis  figures  will  show  the 
cft'ect  of  the  outbreak  of  the  war  on  certain  leading  securities: 

June  25  July  23  July  JO  Dec.  7 

I'hrtf  per  ctut  reiito .S.i.()5  81..1O  K2.50  7J  50 

Kus>iaii   S's  <if   19()() lO.'.OO  101.00  05.09  S'8.20 

Ban(|ue  de   France  ' 4,i>40.(K)  4.574.00  4,400.00  4.6IH).00 

Fiamiuc  dc  Pari.-;  ct  des  l'ays-l!a^.  1,. ^.'0.0(1  l._")5.(M)  l.loO.OO  1,000.00 

(.■oinptoir    d'Kscoinptc    l.OJ'l.OO  004.00  907.00  V.5000 

Credit   I. vt.r,iiai.>  I.(.00.()0  1,4«0.00  1„)40.00  1,050.00 

Nord    Uaihvay'    1.718.00  1,270.00  1,240.00  l..)00.00 

Comment  may  be  made  on  the  practically  complete  recovery 
by  the  Banque  de  I'rance  slinrcs,  and  on  the  improvement  in  the 
shares  of  the  Xonl  Railway,  wliose  properties  were  in  consider- 
able degree  in  (ierman  hands,  over  the  interval  from  Julv  ;!it  to 
the  reopening  of  tiie  bourse.'  .\s  will  later  appear,  the  railway 
had  relations  with  the  government  which  .served  to  protect  its 
shareholders  from  loss.  The  further  great  decline  in  shares  of 
banks  other  than  the  Ban(|ue  de  France  will  be  abundantly  ex- 
plained by  the  developments  between  July  .ind  December,  which 
we  have  now  to  give  an  account  of.  The  decline  in  the  three 
per  cents  of  the  French  Government  to  72.r>0  still  leaves  them 
.selling  at  a  high  price,  in  consideration  of  the  yield.  These 
securities  were  slow  in  getting  into  line  with  other  securities  in 
the  relation  oi  yield  to  j)rice. 

With  a  Ixnirse  demoralized  before  the  war  by  causes  which 
were  not  connected  with  the  war,  with  a  two  years'  period  of 
depression,  which  had  grown  progressively  worse  in  the  second 
year,  just  passed  through,  with  banks  weakened,  with  fiscal 
derangements  of  a  serious  sort,  with  political  turmoil  and  minis- 
terial instability,  FVance  entered  the  war.  In  a  very  short  time 
her  most  important  mining  and  manufacturing  sections  in  the 
north  and  northeast  were  overrun  by  the  (iermans,  and  Paris 

'  (Juotatii'us  (if  1  )(.-iiniliir  14.  No  inmtatKin^  nu  IVccmbcr  7.  Cf.  London 
I'.CKtinmist,   l)tiiinlnr   19.   1914,  page   10/0 

'  I  here  is  im  Mnuifieance  tn  tie  attached  ti)  the  tact  that  both  of  these 
i|uotatioiis  cnme  mi  Deceniher  14.  while  the  ntlierh  in  this  coluiiiu  are  as  of 
Decciiihcr  7.  Quotation-;  were  few  oil  hoth  dav.s  .■ii\d  conipari^fin  lietween 
ihetn  reveals  no  jre"era1  drift  for  the  week.  The  main  chanties  from  Oc- 
rindu  r  7  to  riecemher  14  were  a  rise  of  fifty  point--  in  Comptoir  d'Escompte, 
and  a  further  drop  of  twenty-five  points  in  Credit  I.yonnais. 


FRANCE 


49 


was  in  serious  danger.  Industries  of  all  kinds  were  further 
demoralized  throughout  France  by  the  mobilization  throughout 
of  a  large  portion  of  the  lal)or  force  and  by  the  commandeering 
of  railways  for  troop  movements.  It  was  impossible  that  the- 
ordinary  processes  of  credit  should  go  on  under  such  conditions. 

The  bourse  was  the  weakest  point.  Xe.xt  in  point  of  help- 
lessness and  timidity  were  the  great  credit  houses,  such  as  the 
Credit  I.yonnais,  Societe  Generale  and  others  whose  char- 
acter and  operations  wc  have  been  discussing.  The  state  had 
credit  resources,  particularly  in  view  of  the  large  sums  of  hoarded 
money  which  were  ready  for  investment  in  the  short  term  obli- 
gations of  the  state,  and  very  especially  because  of  its  relations 
with  the  Banque  de  l-" ranee.  A  pillar  of  strength  in  the  situation, 
and,  indeed,  the  one  really  solid  element  in  it,  were  the  unshaken 
prestige  and  courage  of  the  Banque  de  France.  Even  that  insti- 
tution, however,  fell  back  on  extraordinary  remedies,  and  despite 
its  enormous  gold  reserve  it  suspended  '  specie  payments,  and 
issued  its  notes,  under  government  authorization  under  the 
cours  force  (legal  tender  irredeemable  notes).  This  step  was 
taken  on  .\ugust  5,  11)14. 

Bankrui)tcy  threatened  almost  everybody.  Few  indeed  among 
men  active  in  business  or  finance  had  the  ready  cash  to  liquidate 
their  debts,  when  so  many  of  their  debtors  were  unable  to  meet 
obligations.  The  bourse  had  carried  through  its  settlements 
readily  enough  in  1870.  It  seemed  wholly  unable  to  do  so  in 
1914.  With  the  cessation  of  bourse  trading,  loans  on  "  reports  " 
(stock  and  bond  collateral  loans)  made  in  large  quantity  by  the 
Paris  banks,  usually  counted  on  as  a  liquid  asset,  became  frozen. 
The  banks,  moreover,  with  substantial  holdings  in  securities, 
particularly  the  Bulgarian,  Brazilian,  Mexican,  Russian  and 
other  inferior  securities,  which  the\  had  been  marketing  to  their 
depositors  in  the  boom  period  preceding  1912,  and  even  in  the 
depression  following,  were  faced  with  heavy  losses  if  they  tried 
in  any  way  to  use  these  assets — for  which  in  fact  there  was  no 
market  at  all.     Nor  was  even  commercial  paper,  supposed  to  be 

'  this  is  a  traditiuiial  practice  of  the  Banque  de  I'" ranee  in  emerRencies— 
as  in  1848  and  1870.  One  xvd.ulcrs,  however,  why  it  deems  it  worth  while 
to  accumulate  gold  reserves,  if  it  does  not  expect  to  use  them. 


50 


EKFFXrS  OF  THE  WAR  ON    MONEY,   CREDIT   AND  BANKING 


always  a  litinid  asset,  in  better  plight.  Industry  was  demoralized; 
commerce  at  a  standstill.  Few  merchants  indeed — not  to  mention 
those  in  occupied  territory — could  liquidate  their  acceptances  at 
maturity.  The  pressure  was  most  imnK.Ii.tely  felt  at  the  bourse 
anil  next  at  the  banks. 

To  meet  this  situation,  a  moratorium  was  proclaimed,  first 
aft'ectinj;  the  bmirse  and  the  banks,  but  shortly  extended  to  cover 
commercial  pajv.'r.  house  rents  and  a  very  wide  range  of  debts 
indeed.  The  jj;cneral  initial  scheme  of  the  government  for 
meeting  the  emergency  is  thus  summarized  by  the  London 
Economist  of  August  1."),  1014  : ' 

A.  Economic  measures: 

I.    The  susptii>iuii  of  import  duties  on  wheat,  barley,  oats,  maize,  hay. 
II.  I'Vec  importatiiiii  for  frozen  meats  and  potatoes. 

III.  Kmb.irgo  on  exports  of  salt. 

IV.  I'rohiliition   to   export   foodstuflfs  and  contraband  of  war,  including 

all  arin>   .mil  ikivv  materials,  live  animals,  motors,  explosives  of 
all  kinds,  cold   storage  apparatus,   nitrate  of   soda,   lead,   provi- 
sions, transiiort  vehicles,  etc. 
v.    i  he  ofKani/ation  of  relief   for  the   families  of   conscripts  called  to 
the  ciilors. 

B.  financial  niciisures: 

I.  Declaration  of  a  temporary  moratorium  for  bourse  and  coulisse 
transactions  entered  into  before  .August  1,  settlement  being  post- 
poned till  .Kugust  30.  (This  settlement  was  subsequently  post- 
poned many  times,  and  remained  a  vexed  and  difficult  question 
for  a  long  time.) 
II.  (a)  Depositor.',  in  banks  with  deposits  under  250  francs  are  allowed 
to  withdraw  the  whole  sum:  (6)  above  this  sum,  depositors 
can  wnhdrav.  only  5  per  cent  of  the  surplus,  with  a  provision 
that  employers  ol  labor  may  draw  what  they  can  show  to  be 
necess.iry  for  paying  the  wages  of  employes  on  each  pay  day; 
(f)  the  moratorium  to  extend  to  insurance  contracts;  id)  cer- 
tain relaxMlioiis  of  the  instalment  pas  lents  due  from  the  sub- 
scribers to  the  IVeiich  ,V  _•  per  cent  loan  just  issued. 

III.  Savings  banks, — Withdrawals  of  <leposits  are  limited  to  fifty  francs 
per  fortnight  for  each  depositor. 

I\'.    rile  is'-iii.  Ii\   llie  government,  of  twenty  franc  and  five   franc  legal 
tender  m  tes. 
V.  Su-pension  of  specie  payments  by  the  Hanque  de  France. 

To  tiiese  should  be  added  certain  further  details:    The  law  of 
August  .'■>.  which  authorized  suspension  of  specie  payments  by  the 
'  Page  321. 


FRANCE 


51 


Banciue  tie  France  (and  the  note  issuing  Banque  de  I'Algerie), 
raised  the  Hmit  of  note  issue  for  the  former  from  «,>(tO,OUU,OUO 
francs  to  1:.'.0U0,000.U00  and  of  the  latter  from  .-JUO.OdU.ooO 
francs  to  400,000,000.  These  legal  limits  are  always  kept  well 
in  advance  of  the  actual  issue.  So  far  as  the  Banque  de  France 
is  concerned,  they  have  never  actually  restricted  issue.'  During 
the  course  of  the  war  they  have  been  raised  again  and  again.  For 
the  Banque  de  France  the  legal  limit  was  raised  to  l'T  billion 
francs  on  February  7,  1918,  and  on  May  3,  1018,  it  was  raised 
to  :J0  billions.^  The  limit  for  the  Banque  de  I'Algerie  was  raised 
to  700  millions  on  May  28,  1918.'  In  these  impressive  figures 
for  the  Banque  de  France  note  issue,  largely  attained  as  we  shall 
see  by  the  actual  note  issue,  most  writers  see  one  of  the  most 
ominous  features  in  the  course  of  the  four  years  of  the  war  for 
French  finance,  and  we  have  at  all  events  clear  evidence  of  the 
extent  to  which  the  government  has  leaned  on  the  Banque  for  its 
war  needs.    But  this  will  receive  later  attention. 

By  August  9,  1914,  the  moratorium  was  extended  to  all  nego- 
tiable instruments,  except  those  issued  by  the  public  Treasury 
itself  and  except  checks  presented  by  the  drawer.  This  mora- 
torium, as  the  moratorium  on  bank  deposits,  expected  originally 
merely  to  give  thirty  days'  delay,  was  subsequently  extended 
many  times,  and  there  remain  large  blocks  of  premoratorium  bills 
in  the  assets  of  the  Banque  de  France  late  in  the  summer  of  1918. 
The  problem  of  the  rent  moratorium  was  being  debated  by  the 
Chamber  of  Deputies  in  the  summer  of  1918  and  various  schemes 
were  being  then  proposed  for  bringing  it  to  an  end.  The  bourse 
moratorium  remained  a  serious  problem  for  a  very  long  time. 
It  is  easy  to  declare  a  moratorium;  France  has  found  it  very 
difficult  to  get  rid  of  one!  There  have,  however,  been  gradual 
steps  taken,  undoing  the  initial  rigors,  and  we  shall  trace  these 
steps  in  a  later  chapter. 

The  great  jjfivate  banks  took  full  advantage  of  the  moratorium 


'  .\i)parently  the  only  reason  for  retaining  a  legal  limit  on  the  issve  of 
iIk-  Han(|ue  tie  I'rance  is  that  the  legislature  is  thereby  enabled  to  v.rest 
concessions  from  the  Banque  from  time  to  time,  as  the  limit  is  raised. 

'  Hullctiu  lie  Slatistiquc  et  dc  Laiislalwn  Comparh,  May,  1918,  page  853. 

•  Ibid.,  page  887. 


52  KKFIXrS   (IF  THE   WAR   ON    MONEY,    CREDIT    AND   BANKING 

on  (leptisits.  They  were  weakened  and  they  were  frij,'htened. 
I'mtected  from  the  pulihc  by  the  moratorium,  they  still  turned 
fur  addiiional  safety  to  the  F.an(|ue  de  France  and  turned  their 
rediscountaMe  assets  into  cash  on  a  great  scale.  The  following 
figures  will  show  something  of  the  extent  of  this: 

CREDIT  I.VOWAIS 

June  iO.  1914  May  31,  1915 

Cash  in  haiul  or  with  b.mks Fr.  i.H.Od'MKIO  Fr.  678.00(1,000 

HilU    d.scouiitc.l    1,64,S       i.miO  9U100U.UO0 

I.oaiK  oil  MCiiritK-   ,?.=;'i.!.0().(ll)()  262,O0O,(JO0 

Current  accuinits  ( assrt  l   714,000,000  401.(XI0,000 

All  the  leading  l-Vench  ])rivate  banks  present  similar  figures.' 
The  deposits  and  current  accounts  (liability)  of  these  banks  show 
a  great  shrinkage  also,  while  their  acce])tances  fall  ofY  very 
heavilv  indeetl.  During  no  small  part  of  the  first  year  of  the 
war,  the  extra  note  issue  of  the  Banc|ue  de  France  scarcely  made 
good  the  gap  left  by  reduced  credit  extensions  by  the  private 
banks. 

.\  fatalistic  view  of  the  situation  will  see  in  tiiis  policy  of  the 
French  ])rivate  banks  merely  the  necessary  consequence  of  the 
moratorium  and  the  ditiRculties  of  the  bourse.  It  may  be  almost 
as  well  argued,  however,  that  the  difficulties  of  the  bourse  and  the 
moratorium  were  due  to  the  policy  of  the  banks.  The  banks 
were,  as  we  have  seen,  in  large  measure  indeed  responsible  for 
the  flotation  of  unsound  securities  at  inflated  values,  whose  col- 
lapse placed  the  bourse  in  such  straits.  They  may  possibly  have 
been  so  shaken  by  this  that  they  were  helpless  when  the  crash 
came.  If,  however,  their  balance  sheets  tell  the  truth,  if  their 
"  securities  owned  "  were  really  all  comprised  in  their  figures 
for  this  item,  then  they  should  have  been  in  a  position  to  meet 
much  better  than  they  did  the  great  emergency.  It  is  the  duty 
of  banks  to  lend  freely  in  panic  times.  It  is  their  duty  to  pay 
their  depositcjrs  i^n  demand.  It  is  only  by  these  measures  that 
panics  can  be  checked  and  the  credit  machinery — on  which  in- 
dustry and  trade  today  depend — kept  going.  If  depositors  are 
sure  that  they  can  get  their  deposits  on  demand,  they  will  not 
make  heavy  calls  on  the  banks.    If  solvent  business  men  are  sure 

'  Quiirt<-r!y  Joiinu)t  nf  F,niinmics.  N'ovember,  1915,  pages  73-74.  Cf.  the 
chapter,  infra,  on  tlie  "  Private  Banks." 


FRAN  ;t 


53 


that  they  can  borrow  what  they  nc  .1  -  meet  their  obligations, 
they  will  not  try  to  borrow  in  excess  of  their  needs.  It  is 
precisely  in  such  situationb  thai  more  rather  than  less  bank  credit 
is  needed.  The  banks  of  America  in  panics,  hampered  by  absurd 
legal  reserve  laws  and  lacking  a  central  bank  at  which  they  could 
rediscount  their  paper  when  reserves  run  low.  have  more  than 
once  had  to  suspend  cash  payment  of  checks  and  have  had  to 
curtail  lending  in  panic  times.  But  London  has  proved  again 
and  again  that  these  things  are  unnecessary,  that  panics  can  be 
met  and  stopped,  if  only  the  banks  will  be  courageous  enough. 

It  is  easy  to  sneer  at  the  cowardice  of  these  private  banks  in 
France.  It  may  be  urged,  and  with  force,  that  London  found 
this  policy  hard  to  carry  out  in  the  great  emergency  of  ll>14,  and 
that  the  London  joint  stock  banks  likewise  curtailed  loans, 
hoarded  gold  and  rediscounted  heavily  with  the  Bank  of  Eng- 
land. It  may  be  noted,  however,  that  the  London  banks  quickly 
recovered  from  their  fright  a-v  ,  further,  that  one  great  trouble 
in  England  at  this  time  came  from  France  itself — many  London 
brokers  who  had  funds  due  from  French  brokers  were  unable  to 
pay  their  debts  because  of  failure  to  get  remittances  from 
France.'  In  London  as  in  Paris  the  stock  market  was  the  weak- 
est point,  and  the  English  moratorium,  which  was  soon  largely 
dispensed  with,  came  initially  from  this  weakness.  Possibly  the 
shock  was  so  great,  the  disaster  so  appalling,  the  loss  from  Ger- 
man invasion  so  great,  that  no  amount  of  courage  on  the  part 
of  the  I>>ench  banks  could  have  averted  the  moratorium.  But 
surely  it  is  possible  that  more  could  have  been  done. 

M.  Alfred  Xeymarck,  in  his  paper  on  "French  Savings"  in 
the  National  Monetary  Commission  Report,"'  makes  a  compari- 
son of  the  American  and  French  systems  very  adverse  to  us, 
based  on  (jur  experience  in  1!K)7.  If  we  had  had  a  central  bank 
of  issue,  he  thinks  that  our  crisis  could  never  have  occurred. 
And  not  a  few  writers  have  compared  our  system  with  the  French 
system,  very  much  to  the  advantage  of  the  latter  from  the  stand- 
point of  meeting  crises.     Americans  have  taken  these  lessons 

Financial    Svstem,'"    British    Economic 


'J,    M.    KoMics:    "War    ami    tli 
Journal.  Si-ptimbiT,  1914,  page  46.-. 
'  Senate  Document  No.  494,  61s;  Cong 


2d  Sess..  pages  180-181. 


54  EI  TKCTS  OF  THE   WAR  OX    MONEY,   CREDIT   AND  BAXKING 

humiily  and  have  profited  hy  them.  Surely  we  have  little  to 
be  proud  of  in  this  matter  prior  to  I'.tU.  But  it  is  exceedingly 
i'^'.  :;  to  see  a  distinguished  French  financial  authority  pro- 
p^,..ij;  as  a  means  of  mitigating  the  absolute  tie-up  of  French 
deposits  the  remedy  which  we  have  repeatedly  made  use  of  in 
panic  times — the  use  of  clearing  house  certificates  in  payments 
between  banks  and  the  use  of  checks  "  good  only  through  the 
clearing  house"  as  a  means  of  mobilizing  deposits!  This  pro- 
posal was  maile  by  M.  Raphacl-deorges  Levy  in  Figaro  of 
August  L'2,  lit  14.  and  was  endorsed  by  the  Economistc  Francois.^ 
Nothing  apparently  came  of  it.  but  something  has  since  been  done 
in  develo])ing  further  the  Paris  clearing  house  (Cliambre  de 
Compensation  des  Banquiers  de  Paris),  which  under  a  new 
name  has  become  a  factor  of  some  importance.  The  use  of 
checks  has  also  been  sedulously  encouraged,  as  we  shall  see. 

The  Ecotioitiish-  Froncais  has  from  the  first  been  of  the  opin- 
ion that  the  moratorium  went  to  wholly  unnecessary  extremes. 
It  thinks  that  the  bourse  moratorium  could  have  l)een  avoided 
and  that  special  arrangements,  with  an  assistance  fund,  the  grant- 
ing of  delay;  in  special  cases,  with  informal  cooperation  of  banks 
and  bourse,  would  have  sut'ticed.  The  lx)urse  tie-up  involved  the 
whole  system  and  stifled  iiulustry  generally.  But  the  Econnmistc 
denies  that  even  the  moratorium  on  the  Ixiursc  and  the  ra- 
torium  on  commercial  paper  justified  the  moratorium  on  de- 
posits, because  the  banks  could  rediscount  with  the  Banque  de 
France,  which  could  issue  untes  under  iniirs  ford-.'  It  seems 
pretty  clear  that  the  banks,  other  than  the  Hamiue  de  France, 
showed  themselves  cowardly  and  hel|)less.  sought  only  their  own 
safety,  refused  to  take  good  checks  in  dollars  or  sterling,  de- 
manded wholly  unreasonable  margins  and  other  i)rotection  in 
such  loans  as  they  made,  and  even  proved  a  positive  burden, 
rather  than  an  aid,  in  the  difficult  situation.  Thc\  av.iikil  thetn- 
sclves  of  the  rediscount  privilege  to  an  exaggerated  degree  '  and 
then  lioanled  the  proceeds. 


"  \'ol.  2.  1014.  iiaRr^  276-J77 

'  /',■  MMwiiiV  f'ranoii.i.  AiiBtist  8.  l'»14.  (i.ig,.  JOJ. 

'  Ijindnn  lUoiiomisl.  Srptcmbcr  2(\  I114.  paur  $29. 


FRANCE 


56 


One  obvious  evil  growing  out  of  the  moratorium,  with  its 
complete  lock-up  of  deposits  and  of  the  bourse,  was  the  inability 
of  the  government  to  rely  on  the  usual  machinery  of  securing 
loans.  The  funds  needed  for  the  war  came  for  many  months 
either  from  the  Banque  de  France  directly  or  else  from  the  notes 
and  gold  hoarded  by  the  people,  who  bought  short  term  notes  of 
the  government  (bans  dc  la  defense  nationalc)  partly  because 
there  was  nothing  else  they  trusted  in  which  to  invest. 

Some  sort  of  moratorium,  at  all  events,  some  very  extraordin- 
ary remedies,  were  demanded  by  the  wholly  unprecedented  sit- 
uation. But  France  seems  to  have  overdone  the  thing  at  every 
step,  and  tied  herself  up  in  coils  from  which  she  has  not  yet 
fought  wholly  free.  The  major  part  of  the  blame  for  this  may 
well  be  placed  on  the  great  private  banks. 


CHAPTER  IV 


Depression  and  "  Reprise  des  Affaires  " 


In  tracing  the  history  of  money,  credit  and  banking  in  France 
during  the  war.  we  shall  give  attention  to  certain  large  topics, 
some  of  which  can  be  treated  with  considerable  detail.  Among 
these  are  the  following:  (1)  The  economic  depression  that  fol- 
owed  the  oiitl)rcak  of  the  war  and  the  gradual  resumption  of  in- 
dustrial and  commercial  activity  to  which  the  French  have  given 
the  name  "  rcf^risc  des  affaires."  {i)  The  disturbances  in  the 
technique  of  industry,  particularly  in  the  matter  of  raw  materials, 
labor  force  and  coal,  and  in  transportation,  both  by  land  and  sea, 
which  have  grown  out  of  the  war.  (\\)  The  moratorium  and  the 
efforts  to  get  rid  of  it.  (4)  The  course  of  .security  prices  on  the 
French  b<jurse  and  the  main  causes  affecting  them.  { .'» )  The  role 
of  the  I>anc|ue  de  France  during  the  war,  including  an  account  of 
its  relations  with  the  state,  its  aid  to  industry  and  commerce,  its 
relations  with  other  banks,  its  gold  policy  and  the  main  changes 
in  its  balance  sheet.  (<i)  The  effects  of  the  war  on  the  great 
private  banks,  the  provincial  banks  and  the  savings  banks.  (7) 
Public  fmancc.  with  special  reference  to  taxes  and  public  U)ans, 
and  the  reaction  of  public  finance  on  banking  and  foreign  ex- 
change. ( "» )  Tlie  foreign  trade  of  I'rance  and  the  problem  of 
foreign  exchange  rates  and  international  p.iyments.  (!>)  The 
changes  in  the  circulating  medium  in  France:  the  disappearance 
of  gold  and  silver  coin,  hoarding,  substitutes  for  cnin,  the  etTorts 
to  pupul.irize  the  use  of  checks,  the  extension  of  tlie  rle.iring 
houM'  'system.  (  HM  jhe  course  of  commodity  prices  in  France 
;ind  tlie  main  causes  affecting  them. 

TIk'H'  tnpic>  are  all  interrelated  and  the  order  nf  treatment  is 
more  (ir  less  a  matter  of  arbitrary  choice.  It  v  ill  be  convenient, 
however,  to  Nkctcli  cert;iin  general  feature^  in  large  outline  before 
undertaking  a  <lctaile<l  treatment  of  any  of  them. 

.in 


FRANCE 


67 


There  are  two  main  ways  of  guiding  and  controlling  produc- 
tion and  consumption.  One  is  the  method  of  private  enter- 
prise, under  which  individuals  and  corporations,  each  seeking 
individual  advantage,  move  under  the  stimulus  of  rising  prices 
to  those  lines  of  industry  where  profits  are  greatest,  or,  when 
prices  fall,  curtail  their  production  in  the  lines  where  profits  are 
being  cut.  Rising  prices  tend  also  to  curtail  consumption  in  any 
line  where  there  is  shortage  and  falling  prices  encourage  in- 
creased consumption.  If  prices  in  general  are  rising,  but  rising 
more  rapidly  in  some  lines  than  in  others,  the  lines  in  which  they 
are  rising  most  rapidly  will  bid  up  the  prices  of  supplies,  labor, 
etc.,  and  so  force  the  lines  where  prices  are  rising  less  rapidly 
to  curtail  because  of  rising  costs.  This  general  peace  time  system 
has  been  analyzed  in  detail  in  our  treatises  on  economics,  and  we 
feel  that  we  understand  it.  State  activity  under  this  system  need 
not  i  V.  Ive  any  radical  alteration  in  the  system.  The  state  may 
act  on  commercial  principles,  buying  in  the  open  market  what 
it  needs,  paying  going  prices  for  what  it  buys  and  taking  its 
chances  with  other  buyers  in  the  process.  In  a  great  war,  the 
state  may  continue  this  policy,  drawing  labor  and  supplies  to  the 
production  of  what  it  needs,  merely  by  oflFering  so  great  a  pecun- 
iary inducement  that  other  purchasers  are  forced  to  be  content 
with  less  than  they  would  otherwise  have  of  the  products  of  the 
country's  industry.  It  was  in  this  way  that  the  North  carried  on 
the  Civil  War.  It  was  in  this  vay  that  the  Spanish-American 
War  was  conducted  by  the  federal  government.  In  most  wars 
in  the  last  century  down  to  the  present  great  struggle,  this  peace 
time  mechanism — private  enterprise,  economic  freedom,  industry 
motivated  by  free  price  offers — has  been  relied  upon. 

The  other  great  system  is  the  socialistic  system,  under  which 
authoritative  commands  from  the  government  are  substituted  for 
the  lure  of  prices.  Men  produce  goods  because  the  government 
drafts  their  labor;  men  supply  raw  material<>  because  the  govern- 
ment commandeers  their  supplies — just  as  men  go  into  the  army, 
not  because  the  government  pays  them  to  do  so,  but  because  the 
government  con«  ipts  them.  U'li.er  this  system  there  is  need 
for  a  great  deal  n.jre  of  conscious  public  planning  than  is  the 


5S 


EFFKCTS  OF  THE   WAR  ON    MONEY.   CREDIT   AND  BANKING 


case  under  tlie  system  of  private  enterprise.  Under  the  latter 
system  the  jirices,  simmiarizing  the  influence  of  many  individual 
activities,  give  a  chte  wliose  guidance  the  individual  can  follow 
with  a  good  deal  of  contklence.  The  prices  are  wiser  than  any 
individual  who  heli)s  to  make  them.  There  need  be  nowhere  in 
the  social  system  any  single  brain  which  summarizes  the  whole 
situation.  The  economic  process  goes  on,  with  a  large  degree  of 
social  unconsciousness,  even  thougli  each  individual  be  clearly 
conscious  of  those  immediately  relevant  facts  which  affect  his 
own  personal  activities.  I'nder  the  socialistic  system,  however, 
there  must  l)e  a  social  brain.  It  i  s  if  the  brain  in  the  human 
body  were  supervising  the  beatiU;  .if  the  heart,  the  How  of  the 
blood,  the  digestive  processes,  the  metabolic  processes.  Hitherto, 
since  the  development  of  modern  industry,  governments  have 
rarely  felt  themselves  strong  enough  or  had  an  organization  well 
enough  developed  to  venture  far  in  substituting  conscious  public 
control  for  the  informal,  socially  unconscious,  private  control  of 
industry.  In  this  great  war,  however,  the  emergencies  have  been 
so  great,  the  need  for  fundamental  reorganization  of  industry 
has  been  so  obvious  and  the  ability  of  private  enterprise  to  make 
the  sudden  readjustment  has  been  so  doubt  fuV  liiat  there  has  l)een 
a  wide  extension  in  all  countries  of  the  system  of  authoritative 
control. 

Fart  of  this  has  Iwen  in  the  direction  of  price  fixing,  which 
to  be  effective  has  al.so  involved  control  of  production  and  control 
of  distribution  of  supplies,  with,  in  many  cases,  actual  rationing 
out  of  stocks.  When  prices  are  fixed,  .some  form  of  control  of 
con.sutnpti(m  and  production  must  go  with  \t.'  The  present  study 
will  not  deal,  excepi  in  passing,  with  |)rice  fixing  in  any  of  the 
countries  consi<lered.  lUit  it  must  Ik;  mentioned  as  one  of  the 
interesting  compmmises  between  the  system  of  free  enterprise 
and  the  system  of  complete  social  control. 

I'ractically  no  country  has  gone  all  the  way  in  substituting 
authoritative  control  of  industry  for  the  jiricc  system,  (icrniany 
has  gnno  furtlicr  tinn  any  other  country. 

'  Cf  pro^tiit  wriiir\  p;ip«r.  "  \'.iliir  and  I'riit  Tlimrv  in  Relation  to 
Price  Fiviiit.  iim!  \\  ir  I  in  m.i."  iti  l';i|i(  r<i  an;!  I'roceedillK''.  .Su|)plemcnt  to 
th»'   .M:irch.   Iyl8,  .'incriian  licoiicniic  Knieti'. 


FRANCE 


59 


Among  measures  which  have  been  used  to  greater  or  less 
extent  by  all  of  the  European  belligerents,  and  most  of  which 
have  l)€en  applied  in  the  United  States,  we  may  mention  the 
following:  moratoria,  or  informal  substitutes  for  moratoria,^ 
wiiich  practically  means  a  temporary  pooling  of  assets  and  liabili- 
ties of  j)rivate  enterprises,  to  give  those  most  demoralized  by  the 
shock  of  war  an  opportunity  to  get  their  bearings  and,  if  pos- 
sil)Ie.  avert  bankruptcy;  the  supplying  of  credits  by  the  state,  or 
by  banking  houses  acting  together  in  a  public  capacity,  to  meet 
the  same  difficulty;  the  supplying  of  credits  or  the  giving  of 
unusual  contracts  vvliich  afford  an  unusual  degree  of  safety  to 
the  entrepreneur,  to  those  enterprises  which  are  called  on  to  pro- 
vide vitally  needed  supplies  for  war  purposes — often  accom- 
panied I)y  tlie  viitual  commandeering  of  their  plants;  the  pubUc 
control  of  capital  issues  of  corporations,  including  municipal  cor- 
porations, with  a  vie»<-  tt)  limiting  credits  given  to  "non-essen- 
tial "  industries,  to  lessen  their  ccmpetition  with  the  government 
or  with  essential  industries  in  the  markets  for  goods  and  labor; 
the  drafting  and  regimenting  of  labor  as  part  of  the  general  sys- 
tem of  drafting  men  for  the  army — a  process  rarely  carried  to 
its  possil)le  limits,  and  usually  accomplished  with  as  little  inter- 
ference with  the  economic  interests  of  the  lalx^rer  as  possible; 
the  control  of  transportation,  which  gives  a  powerful  lever  for 
checking  non-essential  production  and  encouraging  essential  pro- 
duction; the  control  of  basic  raw  materials,  especially  coal,  steel, 
copper,  cement,  etc..  to  make  sure  that  they  go  where  most 
neefled  for  public  purposes:  price  fixing,  which  has  commonly 
gone  with  this  control  of  basic  raw  materials,  as  well  as  with  the 
control  of  food  and  other  necessities  of  life;  control  of  foreign 
trade.  l)oth  in  the  matter  of  exports  and  imports:  control  of  gold 
shipments,  sometimes  done  through  government  agencies,  as  the 
Treasury  and  Federal  Reserve  Board  in  the  United  States, 
though  more  frequently  through  central  banks,  as  in  England 
and  I'rance:  conscious  public  policy  exercised  in  the  s^  ne  general 

'  In  the  Unilffi  Slates,  this  "vas  limited  to  the  outbreak  of  the  great  war 
in  1014  .uiil  tlu'Ti  cotiliiied  to  the  ^|l)l•k  market.  There  was  no  formal 
moratorium.  Init  informal  arranKeineiils  heiwecn  the  cltarinB  house  banks 
in  New  Vork  ami  the  stock  exchange  authorities  met  rlie  situation. 


60  EFFECTS  OF  THE  WAR  ON    MONEY,   CREniT   AND  BANKING 

way  with  reference  to  international  exchange  rates,  involving 
cooperation  of  all  the  agencies  concerned  with  gold  shipments, 
imports  and  exports  and  public  loans,  as  well  as  the  diplomatic 
service,  and  great  private  banking  houses  concerned  with  inter- 
national loans  for  private  corporations.  In  this  connection  it  is 
interesting  to  note  that  there  have  lieen  some  international  duels 
fought  in  the  neutral  exchange  markets,  Germans  seeking  to 
depress  sterling,  franc.  rouI)Ie  and  even  dollar  exchange;  the 
English  seeking — at  times  with  decided  success — to  depress 
mark  exchange.  The  full  story  of  this  may  later  be  told  and 
will  make  an  interesting  chapter  in  the  history  of  the  war.  For 
the  present  the  writer  is  able  merely  to  mention  it  in  general 
terms. 

The  contrast  between  Germany  and  France  with  reference  to 
the  extent  to  which  jiubiic  control  has  been  substituted  for  pri- 
vate control  will  perhaps  be  the  best  means  of  exhibiting  the 
distinctive  features  of  France's  economic  situation.  In  the  first 
place  Germany,  blockaded  by  the  overpowering  British  navy,  saw 
from  the  l)egining  that  she  must  make  herself  self-sufficing  and 
that  a  radical  transformation  of  her  industries  was  therefore 
necessary.  Control  over  both  consumption  and  production  was 
early  instituted  and  increasingly  strengthened.  France,  on  the 
other  hand,  had  access  to  the  sea.  During  the  early  months 
of  the  war  her  strong  creditor  position  enabled  her  to  make  pur- 
chases abroad  very  readily.  There  was  the  theory  held  in  France 
that  her  capital  accumulations  invested  abroad  would  enable  her 
to  live  on  her  capital  during  the  war.'  Not  only  had  she  great 
foreign  investments,  but  she  also  had  great  stores  of  "capital " 
in  the  form  of  hoarded  billions  of  francs  in  bank  notes.  To  be 
sure,  industry  was  badly  oflf  for  money,  but  this  was  merely 
because  individuals  were  afraid  to  venture  their  funds  in  in- 
dustry, not  because  "  capital  "  was  scarce.'  The  state,  however, 
could  get  this  capital  on  its  own  short  term  notes  readily  enough 
and  make  what  purchases  it  needed. 

'Sec  the  interestitiR  article  by  Kurt  (irolia,  "  Frankreichs  Wirtschaft,  iiti 
Marr,  1917."  Schmnller'<  Jahrbuch  fiir  Geset:gehung,  I'erwaUung  und  U'irt- 
schaft,  im  Deutschen  Kcirhc.  41.  JahrRanR,  Zweites  Heft  (1917).  See  also 
London  Economisl.  January  16,  191S,  page  107. 

*  London  Economist,  January  16,  1915,  page  107, 


FRANCE 


61 


German  writers '  have  made  much  of  the  contrast  between 
Grermany,  the  "  labor  state,"  and  France,  the  "  capitahst  state," 
the  former  hving  by  her  daily  toil,  resting  on  the  firm  foundation 
of  goods  and  services  currently  provided,  and  the  latter  seeking 
vainly  to  live  on  past  accumulations.  The  contrast  is  better 
stated  as  that  between  the  capitalist  state  and  the  entrepreneur 
state.  There  is  not  a  little  in  the  contrast.  But  it  must  be  clear 
that  France's  greatest  economic  difficulties  after  all  grew  out  of 
the  seizure  of  her  richest  manufacturing  sections  by  the  German 
armies,  and  that  her  capitalist  position,  even  based  as  largely  as 
it  was  on  the  inferior  foreign  investments  we  have  described, 
though  it  has  proved  inadequate  as  the  basis  of  a  long  war.  was 
her  only  salvation  in  the  early  months,  when  her  own  industry 
was  so  completely  demoralized. 

Free,  then,  from  the  immediate  necessity  of  reorganizing  in- 
dustry at  home,  France  allowed  the  general  industrial  situation 
to  drift  on  old  lines  for  a  time  and  the  earliest  public  efforts  were 
given  to  the  rehabilitation  of  credit,  so  that  industry  might  be 
set  going,  rather  than  to  a  redirection  of  industry.  Very  early 
the  phrase  "  reprise  des  affaires  "  began  to  be  used,^  and  the  ideal 
involved  in  this  phrase  seems  to  have  been  the  restoration  of 
peace  time  conditions  in  the  midst  of  war.  This  was  symbolized 
by  revivals  in  ordinary  trade,  including  the  trade  in  luxuries,  by 
the  increase  in  railway  gross  receipts,  by  the  growing  shipping 
statistics,  by  the  return  of  normal  life  to  Paris.  "  Paris  is  itself 
again  "  and  similar  phrases  were  heard.  France  was  slow  in 
seeing  that  war  could  not  be  conducted  on  a  peace  time  basis. 

There  was  rational  ground  in  part  for  the     lilure  to  stop  the 

production  of  luxuries.    France  exported  luxuries  to  pay  for  the 

importation  of  necessities.    And  this  was  seemingly  well  enough 

in  the  earlier  period  of  the  war.     It  coiild  not  then  have  been 

foreseen  that  the  time  would  come  when  even  the  exhaustless 

resources  of  the  United  States  would  Ih?  strained,  when  the 

I'nited  States,  an  ally  of  France,  would  l)e  curtailing  lK)th  the 

domestic  production  and  the  importation  of  luxuries,  when  the 

'  li.g.,  ("iroha.  Ice.  cil. 

'  "  La  Temlciice  a  line  crrtaine  Reprise  des  Affaires,"  l.conomistt  Franfau, 
October  24,  1914.  pages  43S-4J6. 


62 


EFFECTS  OF  TUE  WAR  ON    MONEY,   CREDIT   A\l>  BANKING 


labor  of  virtually  the  \vlu)lc  world  would  Ik-  needed  to  repair 
the  terrible  wastes  of  the  gij^aiitic  war.  But  this  made  serious 
trouble  for  France  in  time.  With  the  industrial  recovery  and 
with  the  large  earnings  of  women  who  had  hitherto  had  their 
expenditures  closely  supervised  by  men,  but  who  now  enjoyed 
unheard  earnings  which  they  were  free  to  spend  in  their  own 
way,  there  came  a  great  deal  of  luxurious  expenditure  in  France 
— by  no  means  confined  to  the  laboring  women — especially  in 
I'.nti.  Efforts  on  the  part  of  the  government  to  suppress  luxury 
were  checked  in  various  ways.  They  were  checked  by  the  false 
economic  philosophy  of  the  reprise  tics  affaires,  which  saw  in 
growing  business  activity  in  itself  a  sufficient  economic  basis  for 
the  loans  and  taxes  needed  to  support  the  war;  and  they  were 
checked  by  difficulties  which  the  government  encountered  when 
it  undertook  to  limit  the  importation  of  luxuries.  If  France 
should  restrict  the  importation  of  luxuries  from  other  countries, 
then  they  would  retaliate  by  restricting  the  export  of  French  lux- 
uries, on  which  France  relied  heavily  to  offset  her  ever  growing 
adverse  balance  of  trade. 

Meanwhile,  as  lilHi  wore  on,  the  falseness  of  the  business 
philosophy  became  increasingly  clear.  There  was.  despite  busi- 
ness revival,  a  great  shortage  of  lalxir,  of  goods,  of  coal,  of  iron 
and  of  other  things.  The  balance  of  international  payments 
turned  against  France  in  an  ominous  way  and  the  franc  was  at 
a  heavy  di.scouiit  in  many  neutral  markets.  The  world's  ship- 
ping, moreover,  was  increasingly  inadequate  for  the  great  de- 
mands made  on  it,  as  the  Cierman  L' -boats  made  increasingly 
effective  raids  upon  it.  Ribot  had  tried  an  ineffective  move  to 
check  imports  of  luxuries  early  in  I'.Mi!.  But  the  fear  of  retalia- 
tion checked  his  move,  and  it  was  not  till  the  unrestricted  I'-boat 
campaign  l)ega'i  in  IIMT  th.it  effective  steps  were  taken.  Then 
l".n'^'!;iiid  ili'vpite  Fntich  protests  durked  the  importation  of 
hrench  luxtiries  and  France,  on  March  2*^,  l!*!",  prohibited  all 
private  inipurtatinu'-.  excejU  as  specifically  authorized  by  the 
.tate.' 

Sliiwly  ancl  reluctantly,  therefore,  France  came  to  the  thorough 

'  (jr. -I);).  h'C.  cit. 


FRANCE 


68 


and  consciously  planned  industrial  reorganization  which  Ger- 
many put  into  effect  at  the  very  beginning.  There  was  enough  of 
governmental  inter lerence,  as  we  have  seen,  at  the  very  begin- 
ning, especially  in  connection  witli  the  moratorium.  But  the 
movement  that  followed  was  a  reaction,  an  effort  to  get  away 
from  the  moratorium,  to  get  business  free  from  the  toils  which 
the  state  had  thrown  around  it.  The  third  phase,  forced  on 
France,  and  perhaps  not  yet  thoroughly  accepted  in  France,  in- 
volved a  conscious  and  comprehensive  acceptance  of  a  new 
philosophy  of  war  economics — the  doctrine  of  goods  and  services 
instead  of  money  and  business  activity:  the  doctrine  of  neces- 
sities as  opposed  to  the  doctrine  of  "  making  money  circulate." 

It  will  be  of  interest  to  trace  with  greater  detail  certain  phases 
of  the  industrial  depression  and  renaissance  in  France  which  we 
have  sketched  in  broad  outline.  A  good  deal  of  statistical 
material  is  at  hand  with  which  the  picture  can  be  made  more 
concrete. 

The  demoralization  of  French  industry  and  trade  could  hardly 
have  been  greater  in  August,  1914.  By  the  middle  of  that  month 
the  government  was  making  inquiries  with  a  view  to  starting 
industry  again,  but  it  was  hampered  by  many  difficulties,  not  the 
least  being  the  moratorium.  On  October  24,  191+,  the  Econotn- 
istc  Francois^  reports  that  conditions  are  improving.  Paris 
had  l)een  repeopled  after  the  retreat  of  the  Germans.  Confidence 
was  returning.  Business  in  luxuries  was  dull,  but  was  reviving 
in  ordinary  lines.  Mail  was  more  regular  than  it  had  been — 
there  liad  lieen  intentional  delay  in  the  mails  for  military  reasons. 
Passenger  trains  and  water  transportation  both  on  sea  and  on 
rivers  were  still  irregular,  but  much  improved. 

But  business  revived  very  slowly.  There  was  no  ready  money. 
The  silk  trade  in  Lyons,  for  example,  one  of  the  first  industries 
for  which  statistics  were  made  public,  showed  almost  a  complete 
prostration.  In  September,  1913,  76.5,000  kilogrammes  of  raw 
silk  were  handled  there;  in  August.  1914.  only  IS.OOO;  in  Sep- 
tember, 1914.  only  (iO,000.=     Raw  silk  was  down  25  per  cent  in 


'  Pages  435-4,U.. 

■  London  Economist,  November  14,  1914.  page  883. 


64 


EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT    AND  BANKING 


price.  Through  December  business  was  very  inactive.  There 
was  much  unemployment  from  the  very  outbreak  of  the  war. 
The  government  as  quickly  as  possible  organized  relief  work 
and  a  free  distribution  of  food — which  was  complicated  by 
refugees  from  northern  France  and  Belgium. 

In  the  coal  industry,  192,000  people  were  employed  in  the  first 
half  of  1914.  The  figures  for  Augi  t,  1914,  are  36,000;  for 
September,  1014.  29,000.  The  average  for  the  second  half  year 
of  1914  is  37.000.  This  industry,  as  the  metal  industry,  was  of 
course  directly  affected  by  the  invasion.  The  invasion  of  the 
Xord  and  Est  probably  reduced  capacity  by  60  per  cent.  At  one 
time  the  Germans  held  fully  80  per  cent  of  the  metal  industry  of 
France.  In  September,  1915,  about  three-fourths  of  the  blast 
furnaces  remained  in  the  war  zone.' 

Railway  reports  were  gloomy  in  April,  1915.  French  sea- 
borne trade  had  declined  so  sharply  at  the  outbreak  of  the  war 
that  owners  of  vessels  had  been  glad  to  have  them  requisitioned. 
Tonnage  at  the  port  of  Dunkirk  was  1,000,000  during  the  first 
seven  months  of  1914  and  only  200,000  during  the  same  months 
of  1915.  A  similar  tale  appears  for  Calais  and  Boulogne,  while 
Cherbourg,  which  had  been  a  clearing  port  for  great  German 
liners,  had  2,^77,000  tons  in  these  months  of  1914,  and  only 
83.000  tons  in  1915.  There  was,  however,  substantial  revival  of 
shipping  for  certain  purposes  by  April,  1915,  and  freights 
were  up.° 

The  labor  situation  was  confused.  There  was  general  unem- 
ployment in  many  trades  through  the  latter  months  of  1914  and 
through  much  of  1915.  .^t  the  same  time  there  was  marked 
labor  shortage  in  certain  places,  notably  agriculture.  Scattering 
figures  appeared  in  1915,  based  on  investigations  by  the  Labor 
Department,  showing  the  increase  in  number  of  employes  in  con- 
sifleral)le  numbers  of  establishments.  Thus,  of  32.000  establish- 
ments, normally  employing  1.070,000  persons,  half  were  shut 
down  in  August.  1014,  and  the  group  lost  two-thirds  of  its 
employes.     By  Octolier,  2S  per  cent  more  were  open,  and  35 


'  I.nnfinn  Fc'Tiwii'ltl.  September  11.  lOLS.  paces  402-40,1 
•  INd..  May  1.  1915,  page  854;  September  18.  1915,  page  438. 


FRANCE 


65 


per  cent  more  persons  were  employed.  January,  1915,  showed 
43  per  cent  more  firms  open  than  August,  and  83  per  cent  more 
persons  employed.  Moreover,  in  August  those  firms  which  con- 
tinued open  were  at  work  only  a  few  days  in  the  week  and  a 
few  hours  a  day.  By  January  they  were  working  full  time  and 
some  of  them  overtime.  This  was  especially  marked  of  course 
where  government  orders  were  involved,  but  was  not  confined  to 
such  firms.  The  china  and  glass  trade  showed  a  63  per  cent  gain 
in  employes.  In  January,  1915,  all  the  industries  covered  in  the 
investigation  were  about  20  per  cent  below  normal  in  personnel.* 
Later  figures,  covering  a  partially  different  set  of  firms,  27,C00 
in  number,  normally  employing  1,100,000  men,  showed  only 
373,000  employed  in  August,  1914.  and  710,000  employed  in 
April,  1915.  Many  of  those  employed  at  the  latter  date  were 
old  men,  women  and  boys.  In  the  leather  trade,  however,  the 
number  employed  was  only  2  per  cent  below  normal  in  April, 
1915.' 

These  figures  are  not  particularly  significant  from  the  stand- 
point of  determining  the  extent  of  unemployment.  They  might 
indicate  merely  that  much  of  the  labor  was  in  the  army.  There 
are,  however,  unemployment  figures  which  roughly  coincide  with 
these  figures.  Thus,  in  September,  1914,  it  was  estimated  that 
258,000  were  destitute  and  out  of  work  in  Paris;  by  March, 
1915,  this  had  been  reduced  to  151,000;  by  December,  1915,  to 
80,000,  most  of  whom  were  in  the  building  trade  and  in  the 
manufacture  of  textiles  and  finer  clothing.  By  October,  1916, 
this  had  been  re  Uiced  to  47,000.  There  was  in  December,  1915, 
no  unemployment  among  mechanics,  miners,  engineers,  etc. 
Relief  had  been  made  so  easy  that  some  were  out  of  work  from 
choice.  At  the  outset  of  the  war,  the  monthly  charge  on  the 
Ministry  of  Labor  for  unemployment  relief  was  3.200,000 
francs;  by  October,  191G.  this  had  fallen  to  800.000  francs."  In 
the  industrial  suburbs  of  Paris,  imemployment  had  dropped  94 
per  cent.  Nearly  half  the  unemployment  relief  centers  in  the 
provinces  had  been  suppressed. 

'  London  Economist,  March  6,  191S,  page  488. 

'  Ibid..  June  19,  1915.  page  1215. 

•  London  Economist,  January  29.  1916,  page  179;  October  21,  1916,  page  680. 


♦50 


EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND  BANKINU 


Meanwliile.  scarcity  of  labor  had  been  seriously  felt  at  many 
points.  I'Vniale  labor  was  Ijeing  larj^ely  utilized,  especially  in 
the  munitions  factories.  By  the  middle  of  1015  there  was  a 
recognition  thit  many  more  men  were  needed  in  inilustry  than 
at  the  front.  In  July,  I'.tir.,  Albert  Thomas,  Minister  of  Muni- 
tions, proposed  a  plan  for  the  industrial  mobilization  of  labor 
alonjj  semi-military  lines,  to  prevent  .strikes  and  lockouts.  The 
shortaj,'e  of  agricultural  labor  was  very  great.  Xew  types  of 
agricultural  machinery  were  being  introduced  to  meet  the  prob- 
lem and  certain  troops  were  given  fifteen  days'  leave  to  help 
with  the  harvest.  By  the  end  of  1915.  the  class  of  1017  was 
being  re]>laced  in  industry  by  women.  "  rcformcs."  men  unfit  for 
military  duty,  etc..  while  soldiers  were  being  given  temporary 
leave  for  agricultural  work.  Skilled  workers  were  being  combed 
out  of  the  army  for  the  more  important  special  work  which  they 
could  do  Ijehind  the  lines  in  industry.  By  January,  1916,  despite 
the  fact  that  24  per  cent  of  the  lalx.r  force  was  mobilized,  81 
per  cent  was  at  work,  showing  that  r>  per  cent  of  new  labor  had 
been  obtained,  chiefly  women  and  colonial  and  foreign  laborers 
and  refugees.  By  November,  1!»17.  the  figure  for  labor  had 
reached  its  per  cent  of  normal,  despite  the  mobilization  of  24 
per  cent  of  the  old  laborers,  indicating  a  gain  of  22  per  cent  in 
the  laluir  force.  By  February,  litis,  the  laljor  force  actually  at 
work  was  larger  than  the  prewar  normal.'  To  attain  this  result, 
however,  there  had  been  very  heavy  drains  on  the  women  and 
colonies.  In  the  munitions  plants  by  March,  li»17.  the  propor- 
tion of  French  was  only  -U'<  per  cent,  the  rest  being  foreigners  or 
colonials,  and  of  the  French  a  large  and  growing  proportion  was 
women." 

The  figures  for  railway  gross  receipts  show  a  marked  revival 


'  London  liconnmist.  OctohiT  14,  1916,  page  650;  November  24,  1917    naee 
840:   l-tl)ruary  23.  1918,  p.-iRc  344. 

Gi. .lia.  01'.  11/.,  paj;e  373.  Tiroba  lliouKlit  tliat  tin-  liest  service  which 
America,  iti^t  cnterine  the  war  as  lie  wrote,  could  perform  for  France  would 
he  to  «eiid  over  200.000  skilled  workmen'  But  France  herself  was  not  over- 
credtilr.iic  at  the  outset  a'  to  our  power  to  tie  of  real  military  assistance. 
Aiiparcntlv  the  first  tlioncht  on  the  French  honrse,  after  onr  hreak  with 
r,er"iativ.  was  that  now  the  drain  nn  the  Rold  reserve  of  the  Ranque  de 
Fra!'cc  would  he  checked'  I'idr  Ix)ndnn  r.ronmiii.il.  February  10.  1917, 
page  2.13. 


FRANCE  67 

of  business  after  early  1915.  The  following  figures  are  for  the 
month  of  September  for  five  leading  roads  (Etat,  A.K.,  (Juest- 
Etat,  P.L.M.,  Orleans,  Midi.)  for  11)13,  1914, 1916  and  1917  : 

1913  Fr.  128,250,000 

1914 90,741,000 

1916 132,996,000 

1917 149,087,000 

These  figures,  when  broken  up,  show  a  decided  gain  in  com- 
mercial revenues,  as  compared  with  income  from  military  ship- 
ments, when  1916  and  1917  are  compared  with  1914.' 

Another  significant  index  of  revival,  on  which  the  French 
themselves  have  laid  great  stress,  is  the  decline  in  moratorium 
bills  held  by  the  Banque  de  France  and  the  gain  in  new  bills. 
The  following  table  shows  this :  ■ 

Unmatured  Moratorium 
1914                                    bills  bills 

July  23  Fr.  1,541,000,000 

July  30  2,444,000,000 

October  1   2,071,000,000  Fr.  2,405,000,000 

October  29  905,000,000  3,282,000,000 

November  12 313.000.000  3,771,000.000 

necetnber  3   254,000.000  3,587,000,000 

December  31 276,000,000  3.351,000,000 

1915 

January  28  2-;n,000,000  3,182,000,000 

February  25  233,000,000  3,054,000,000 

April   1    231,000.000  2,709,000.000 

April  29   236.000,000  2,55.1000.000 

June  3  262,000,000  2,375,000.000 

Sep.ember  2    284.000,000  2,049,000.000 

October  28  280,000.000  1.916.000.000 

December  2  324.000.000  1.860.000.000 

December  30  429,000,000  1,834,000,000 

1916 

February  3    469,000,000  1,778,000,000 

March  30  395,000,000  1,67.^,000,000 

July  27   440.000,000  1,441,000,000 

November  2 576,000,000  1,357,000,000 

November  30 645,000,000  1,357,000.000 

December  27   620,000.000  1,339.000,000 

1917 

February  1  709,000,000  1,319,000,000 

"  London  Economist,  November,  1917,  page  860. 

'Ibid.,  I'tliriiary  24,  1917,  page  -W  ^ec  also  annual  report  of  the  Banque 
de  France.  January  25,  1917,  pages  38-40. 


68  EFFECTS  OF  THE   WAR  ON    MONEY,   CREDIT   AND  BANKING 

Later  figures  for  these  items  are : 

Unmatured  Moratorium 

1917  bills  bills 

Ju'y  '»  Fr.     559.000.000  Fr.  1.194,000.000 

December  0   802,000.(H)0  1,146,000.000 

1918 

February  14  1,335,000,000  1,124,000,000 

August  8 1,002,000,000  1,068,000,000 

These  figures,  t  ,)ecially  when  taken  in  connection  with  daia 
from  the  great  private  l)anks,  which  we  shall  later  present,  do 
indeed  shcnv  recovery,  liut  they  do  not  show  that  bank  credit 
has  been  extended  to  industry  and  trade  in  France  in  anything 
like  the  degree  that  it  has  in  luigland  and  the  United  States. 
The  great  increase,  as  we  shall  see.  in  bank  credit  in  France  lias 
been  in  the  form  (jf  advances  to  the  state  by  the  Hantjue  de 
France. 

The  figures  are  also  of  significance  in  connection  with  the 
gradual  einancipatii>n — not  yet  complete  by  any  means  in  the 
summer  of  l!»ls — from  the  moratorium. 

Other  important  develojmients  on  the  industrial  side  in  !•  ranee 
during  the  war  have  been  in  the  substitution  of  hydroelectric 
power  for  coal,  particularly  in  the  Pyrenees,  in  Savoy,  in 
Dauphine  and  in  the  Centr.d  I'lateau.  The  anmial  report  of  the 
Banque  de  I'raiice  of  January  :>,-..  1!I17.  speaks  enthusiastically  of 
this  dcvelopnuiit.  It  proves  a  much  cheaper  i)ower  than  coal 
had  been,  (iernian  writers  have  minimized  the  extent  of  this 
an<l  it  has  app.irently  imt  been  sntlficient  to  avert  a  real  crisis,  long 
continued,  in  coal.' 

Certain  phases  of  the  philosophy  of  the  reprise  «/<-,v  affaires 
have  a  curious  look  to  one  wholly  indoctrinated  in  the  "  jjliiloso- 
phy  of  goo(K  and  services.'*  Thus.  I'rance  ".las  been  very  much 
concerned  about  the  vintage,  and  wine  is  the  first  agricultural 
proiluct  to  return  to  normal  after  the  outbreak  of  the  war. 
Moreover,  wine  >lii|imenls  on  the  railways  were  early  larger 
than  normal— due  of  cnurH"  to  the  wine  ration  for  the  army. 
The  IVeiich.  perhaps  wiser  than  we,  regard  wine  not  ;is  a  luxury, 

'  Amiiiiil  ripiirt.  I!;iiii|iii  dv  I'r.inri',  J.-imwrv  25.  I'M'.  p.iKi-  5.  I  o|i(|>  n 
r,.M.M;,it(.  <Mnl.,r  14,  I'll',  imyc  650.  Schmolltr's  Jahrhucli,  41  J.ilirKan». 
1917,  Zwiitis  I  left,  IMK'"  .Vin.,V,t. 


FRANCE 


69 


but  as  a  necessity,  and  this  fact  when  viewed  from  that  stand- 
point need  not  appear  strange.  It  is  somewhat  strange,  however, 
to  find  the  French  Ministry  oi  Public  Works  appointing  late  in 
1910  a  "  Conseil  Superieur  du  Tourisme,"  preparing  for  the 
rush  of  sightseers  alter  the  war  to  the  battle  fields!  But  plans 
were  made  for  enlarging  existing  hotels,  and  lOr  wide  adver- 
tising, and  a  committee  appointed  to  provide  the  necessary  capital. 
The  Minister  of  War  was  approached — .somewhat  prematurely — 
on  the  subject  of  the  admission  of  visitors  to  the  war  zone!  ' 

It  is  somewhat  pathetic  to  think  of  the  enthusiasm  with  which 
the  problem  of  repatriating  the  refugees  in  the  zone  abandoned 
by  Hindenburg's  retreat  was  taken  up  in  1!»17  in  the  light  of  the 
events  of  the  summer  of  15)18. 

There  is  something  fine  in  the  institution  of  a  fair  at  Lyons, 
where  France  could  exhibit  her  new  products  which  were  making 
her  self-sufficient.  The  first  of  these  fairs  wa-<  held  in  r.tH!  and 
had  l.;J40  exhibitors;  the  second,  held  in  IJUT,  had  2,»;()() 
exhibitors. 

Eflforts  of  the  go  ;rnment  to  promote  French  shipping,  espe- 
cially by  granting  credits'  to  builders  and  purchasers  of  new 
ships,  may  !«  passed  with  a  mention.  The  development  of  new 
blast  furnaces  and  tb:  whole  great  movement  for  increased 
munitions  production,  jMJwerfuUy  aided  by  the  state,  are  matters 
which  our  papers  have  often  mentioned.  In  connection  with  the 
granting  of  credits  to  encourage  shipping,  it  is  significant  that 
this  seems  to  lie  merely  one  application  of  a  general  principle  of 
pooling  the  credit  resources  of  the  nation  with  a  view  to  bringing 
all  industry  to  its  feet.  M.  Klotz,  iMuance  Minister,  in  De- 
ceml)er,  1017,  speaking  to  a  Committee  of  the  Deputies,  laid 
down  the  general  principle  that  the  nation  must  l)e  a  unit  in 
meeting  the  burden  of  the  war  and  must  help  to  the  utmost  those 
injured  by  invasion.  He  laid  sj^cial  stress  on  the  granting  of 
necessar>-  cretlits  even  to  firms  spared  by  the  enemy,  to  encourage 
production.'    It  appears  probable  that  the  policy  of  governmental 

'  London  ncnnnmisl.  Novemher  4,  1916,  page  868. 
•  Sm  Jnurnat  OMcifl.  Miy  12.  1917. 

'  Ixmdon  lUonomisi.  December  15.  1917,  page  950.  Octobvr  20,  1917.  page 
570. 


ro 


EFFKCTS  OF  THE   WAR   ON'    MONF.Y,   CREDIT   .AND  nANKINT. 


credits  to  atjriculturf  and  industry  has  l)cen  carried  further  in 
i"rance  than  in  Hngland  and  America  hecansc  of  the  inaljility  or 
nnwillinjjness  of  the  ordinary  hanks  in  I'Vance  to  extend  such 
credits  and  that  an  appreciable  part  of  tlie  "  advances  to  tlie 
state  "  by  the  Banque  de  France  is  <hte  to  this  cause. 

Thniuf^iiout  11' 17  and  I'.'ls  tlie  reprise  </<•.?  off  aires  has  'leen 
under  the  depressing  intluencc  of  the  submarine  and  of  the  short- 
a^^e  of  shipping',  interfering  with  the  export  trade  as  well  as  with 
the  imiiort  trade.  It  has  been  hampered  by  shortage  o.'  coal  from 
the  first.  With  normal  business  activity  nearly  restored,  how- 
ever, with  credit  functioning  ag.iin.  and  with  the  government 
well  organized  enough  to  deal  directly  with  industrial  problems, 
substituting  authoritative  control  fur  the  j)rice  mechanism  where 
neces^^arv  and  suppl  ing  credits  where  ordinarv  l)usiiiess  metlitid^ 
could  nut  secure  it.  the  slackening  of  the  business  teiiif^o  was  not 
an  unmixed  evil.  The  check  on  the  luxurious  consum])tioii  which 
was  so  >itrongly  marked  in  r.>l<i  was  at  all  events  clear  gain 
Moreover,  the  check  was  not  a  >erious  one,  so  far  ;is  tlie  mere 
activity  of  iiusiness  was  concerned.  The  real  evils  were  in 
shortages  of  good-.  The  wnr»t  here  may  have  been  passe<l,' 
though  the  summer  of  r.tl*«  has  lieeii  a  hard  one  It  will  be 
convenient  to  review  some  ])hases  <pf  the  shortage  in  coimnodities 
in  connection  with  the  subject  of  I'rench  pr-ccs,  to  which  we 
now  mm. 

'  See  annual  report  uf  tin-  Haiii|ue  dt-  I'r.iiiH'.  January    1918. 


CHAPTER  V 


Prices  of  Commodities  in  France  during  the  War 

(leneral  index  numl)eis.  covering  a  wide  range  of  com- 
modities, have  not  so  far  as  the  writer  can  discover  been  worked 
out  for  l-'rance  lor  tlie  first  two  years  ot  tiie  war.  lief^innin!-, 
with  tlie  third  (|uarter  of  r.M(!  the  Hulhlin  dc  In  Slntistitjur 
Gciu-nilr  dr  la  l-rancc  lias  puhlished  a  (|iiarterly  index  luiniher. 
with  a  I>ase  in  the  prices  of  r.MM-l'.no,  which  it  compares  with 
Sanerlieck's  Kn^lisli  prices  ( the  Statist's  index  miniher).  There 
is  also  an  index  nuniher  for  fifteen  commodities,  worked  out  hv 
the  same  authority,  iK-^niininf;  with  the  fir>t  (juarter  of  I'.Ul  and 
running  down  thnm^di  the  first  (piarter  of  l'."!.'..  Between  the 
first  (piarter  of  llti:.  and  the  third  (juarter  of  liUtJ.  however, 
there  apjK'ars  to  he  a  complete  },'ap,  so  fir  as  general  wholesale 
price  indexes  are  conceriud.  I'Vagmentary  information  can  !)e 
found,  however,  dealin;.;  wiili  special  classes  of  commodities,  and 
certain  generali:!ation  regarding  "cost  of  living."  Much  infor- 
mation is  contained  in  the  1-rench  correspondence  of  the  London 
/■'(■oiuniiist  from  time  to  lime. 

It  may  U-  w.-ll  to  make  at  this  point  a  distinction  l)etweeii 
"  general  conmKMlity  price>  '  aiul  "  cost  of  living."  The  former 
is  Concerned  with  whole^ale  prices;  the  latter  is  concerned  will, 
retail  prices  and  in  addition  >uch  thing>  a>'  house  rents,  which 
vitallv  aJfect  the  family  luidgel.  When  we  sjRak  of  "cost  of 
living.  '  moreover,  we  often  have  in  mind  a  particular  class  of 
tht  ]>c  pulatioii  and  most  commonly  the  lalH>rers.  Further, 
neither  changes  in  "  gemral  price-"  nor  in  "cost  of  living" 
are  to  lie  identified  oft  hand  with  changes  in  "the  value  (<f 
money."  i  hanges  in  price-  or  in  cost  of  living  may  grow  out 
of  change-  in  the  value  of  money,  hut  they  may  also  grow  out 
of  change-  in  the  values  of  go(Ml>.  It  may  happen,  moreover, 
iliat  lioth  cause-  arc  operative,  i'he  present  chapter  is  chielly 
a  rec'ird  of  f,ict--  -not  a  theory  of  causes. 

71 


7-  KFI  IXrS  OF  THE  WAR  ON    MONEY.   CREHIT   AND  BANKING 

I  he  ciiil  (if  Octdlwr,  IHH.  shows  little  rise  in  prices.  exce])t 
tor  certain  comnindities  where  there  had  developed  an  abnormal 
scarcity.  Chief  anupn^'  tliese  were  coal  and  stijjar,  both  of  which 
came  lar},'ely  from  territory  occupied  by  the  (lermans.  The  coal 
supply  of  liel^niim  was  of  course  shut  olf  and  the  occupied  terri- 
tory sui)plieil  normally  L'<i.00(»,(i0(»  metric  tons,  about  two-thirds 
of  the  normal  coal  production  of  I-'rance.'  lieet  sujjar  ajjain  was 
concentrated  in  northern  bVance  and  Belj^ium.  \\  ine,  especially 
cheap  wine.  wa>  also  short  outside  southern  brance  because  of 
transportation  dilticulties.  These  conmiodities  ro>e  in  price. 
But  the  jjeiieral  list  stayed  dowii.  Metal  ])rices  even  fell.  Bar 
co])per  went  down  from  lMmi  francs  ])er  loo  kilos  to  1 1.">  francs; 
tin  from  4>")  francs  to  W:,  francs.  ( )nly  lead  remained  steady. 
These  prices  are  sijjnificant  of  (,'reat  industrial  (lej)ression.-  Raw 
silk  went  down  l'.">  per  cent  in  price.'      The  London  liconomist 

of  December  .">  re|)orts  f 1  prices  still  low.*     Beef  tluctuates 

between  I.n.".  francs  ])er  half  kilojjramme  against  a  May  averaj;e 
of  :.)•!  franc.  Mutton,  I.l'o  francs  in  May,  was  only  from  .S.l 
franc  to  !.<'.".  francs  in  I  )eceml)er.  Wheat  was  slightly  l)elow  its 
.May  ()rice.  Ilour.  however,  was  somewhat  above  its  May  aver- 
age. The  liconomist  of  December  1l''  reports  a  sharp  fall  in 
sugar,  following  substantial  imjxirtations.  The  government 
l)ought  large  (piantities  of  >ugar  in  Xew  York,  Cuba  and  the 
I'.ast  Imlies.  Sugar  from  (iermany  and  .\ustria  came  in  liti 
Holland  and  Italy  relea.sed  sugar  to  l-rance.  The  high  price  of 
sugar  brought  its  owti  cure  promptly. 

Trance  was  greatly  dependent  on  foreign  sources  for  food 
and  there  was  a  general  modification  of  the  taritTs  on  necessary 
articles.  des|)ite  |)rotests  from  the  |)rotectionists.  This  helped  the 
price  situation.  On  March  •_•.!.  IKl.').  the  I:CiHioiiiist  rei)orts  that 
l)read  was  dieaper  in  i'aris  than  in  London.  Urause  the  French 
(iovernment  was  selling  ;iour  Itelow  cost  to  the  bakers."  and  on 


■  l-auRliliii,  '•/>.  fit  .  panes   ISS-l.W.     Uiii.lon  llconomisl.  Oclnlier  .11,   1914. 
p,iR<-  H(U. 

'  I  niidiin  I rnniniiiJl.  Novcmhir  7.  1914,  page  842. 
'  I'l'nl  ,  Nnviinlicr  14.  pane  '>2l. 
'  Ibid.,  pat!)'  'W7. 
"  Ihnt..  pan.    KI.U. 
•  lh,d..  past  SJS. 


FRANCE  73 

April  21  it  states  that  wine  had  l)ecome  cheap  again  through  the 
marki'tinj^;  oi  the  excellent  I'.tlt  vintage.'  Real  estate  prices  were 
threatened  seriously  by  the  protracted  rent  moratorium.  The 
price  of  wheat  was  giving  occasion  for  concern  in  May  of  1915, 
and  government  control  of  supplies  and  prices  was  being  put 
through. ■  The  liconomist  of  September  4  '  rep(jrts  a  fairly  sat- 
isfactory liarvest,  largely  gathered  in,  with,  however,  food  prices 
generally  higher,  except  for  poultry,  potatoes  and  fruit,  which 
were  normal  in  (juantity  and  price. 

By  the  first  (|uarter  of  liUr)  it  seems  clear  that  no  great  rise  in 
prices  had  occurred.  The  Service  de  Statistique  Cienerale  made 
investigations  covering  fifteen  commodities,  by  quarters,  from 
the  first  quarter  of  I'.Ul  to  the  first  quarter  of  i91.">.  inclusive. 
The  index  ^hows:  * 

1911   (tirst  (niarler) 1,015 

191.5  ( first  quarter ) 1,018 

1915  (first  <|iiarfer) 1,105 

In  the  .\ord,  the  rise  was  .somewhat  greater,  the  figures  being: 

191 1    (  fir!,t  (|iiartcr ) 1,057 

191.S   (  first  quarter) 1,159 

Late  in  September,  the  government  made  admission  that  ex- 
travagant i)rices  had  been  paid  on  government  contracts  Ijecause 
of  haste.''  In  October  a  law  was  passed  putting  control  of  the 
grain  trade  definitely  in  government  hands,  with  maximum  prices 
for  grain." 

The  quantity  and  price  of  wine  have  been  throughout  the  war 
a  matter  of  great  concern  to  the  F-rench.  It  i.s  interesting  to  note 
that  the  tonnage  of  wine  transported  between  November.  11(14. 
and  July,  1!M.">.  was  .'•0  per  cent  greater  than  for  the  same  months 
in  the  \ear  [)rcceding.'  Coal,  labor  and  raw  materials  were  all 
high  and  scarce  in  the  fall  of   I'.tl.').'     The  liconomist  gives  a 

'  l.nmlon  I  ii'ihiinist.  .Vovember  14.  1914,  page  80l». 
•/^l</.  pam-  ll.'i. 

•  IhiJ  .  p»n'  .''>*<■ 

'  Tlu-M'  lijinris  arc  liiketi  from  tlie  London  li<»uniiisl  April  15.  lOlfi,  pane 
712,  anil  (civir  •  'il>  llic  thirteen  mosl  important  <" ■mimoditien  of  the  fifteen 
stu  lud  l>v  till    ^    rvicr  ile  Statistitjue  ("icn<  rale. 

"  l...n.lon  /  ..III, 'mist,  drtnlu-r  2.  1915,  page  508. 

•  //.((/.  Ortolur  -M.  \"\5.  page  f^O. 

'  lh:,f .  N'ovrmtxr  fi.  I")!.';,  pajje  781. 
• /('irf..  p.i«f  s  7M>.  815. 


t  .avigit-  t 


(4  EKFKCTS  OF  THF.   WAR  ON    MONEY,   CREDIT   AND  BANKING 

general  estimate  of  the  rise  of  cost  of  living  in  its  issue  of 
Noveml)er  27  '  as  alxiut  30  per  cent — 50  per  cent  in  some  parts 
of  France. 

By  early  January,  I'.Mti.  the  svigar  situation  was  really  acute.' 
Official  (juotatiinis  of  sugar  were  suppressed  and  the  actual  prices 
went  high.  Meat  had  liecome  scarce  at  the  butchers'.  Butter, 
which  had  sold  at  '^.'2i'>  francs  in  Octol)er,  ]!n:{,  sold  at  4.3.')  in 
()cti)I)cr,  llU.'i.  Cheese  during  the  same  period  had  doubled  in 
price. 

The  official  figures  for  exports  and  imports  from  January  to 
May.  llUii.  show  an  adverse  trade  balance  of  1.2'.t.">.000  francs. 
These  figures  are  liased  on  1!»14  prices.  Imports,  at  \'.H\  prices, 
were  M.tlsT.OOO,  and  exports  1.3!»2.000.  In  connection  with  these 
figures,  the  I'.ci>iti>niist  of  July  2!t '  remarks  that  tiie  adverse 
balance  would  be  tiuich  greater  if  account  were  taken  of  the 
tremendous  rise  in  prices  of  the  preceding  two  years.  In  con- 
nection with  similar  figures,  the  I-.conomist  later  undertakes  to 
reestimate  the  extent  of  the  adverse  balance,  giving  data  from 
whidi  some  indication  of  the  extent  of  the  rise  might  l)e  com- 
puted thougli  not  with  precision.  Thus,  for  the  first  seven 
months  iif  HMfJ  the  figures  show  an  a<lverse  trade  balance  at 
r.O  I  prices  of  :!,H'.i,000  francs:  corrected  figures  would  show 
exports  ni"  L'.'.i'.tu.oiK),  and  imports  of  lO.M.iti.OOO,  making  the 
aiherse  b.ilance  T.iUti.ooo.  We  re.ich  more  certain  ground  in 
the  estimate  of  the  Customs  Department  for  the  imports  and 
exports  of  the  first  nine  months  of  I'.M*!,  where  it  is  stated  that 
articles  of  import  arc  '.K>  per  cent  higher  in  price  than  in  1014, 
and  .irticle-  nl'  eximrt  .'-o  |,.t  cent  higher  than  in  l'.M4.* 

This  gi\es  us  an  average  for  the  first  three  ([uarters  of  1916 
so  f.ir  .is  articles  of  export  .iud  unpf)rt  are  concerned.  Exports 
thiriiii;  tli.it  i>criod  at  I'.Mt  prices  were  •.".."•  Itl.oOO;  imports  7.3^1,- 
(MMi,  (ir  more  than  twice  as  great.  But  the  imports  are  much 
underst.iteil,  stnce  not  all  government  imports  wi-re  declared  at 
th  •  cusiiinis  house,     ll  we  we.glit  imports  by  three,  in  construct- 


'  IjiikIdii   I  ,  <ii,'iiiisl.  Noxtfiiilxr  (>.  1915.  pagt  900 
=  Ihid..  I,iim.irv  l.\  l')l(,,  p.iK.   <« 

•  Ihid  .  pan.    IK'i 

•  Ihul  .  ()iti.l)iT  JH.  V>\<'   iKigc  H23. 


FRANCE  75 

ing  our  average,  and  exports  by  one,  we  shall  not  be  exaggerating 
imports.  Tlie  average  rise  in  prices  ui  exports  and  imports  on 
this  basis  then  would  be  HO  per  cent,  as  compared  with  1U14 
prices,  for  the  first  three  quarters  of  l!»l«i.  This  takes  no 
account  of  internal  prices.  It  takes  no  account  of  many  items 
needed  in  a  good  index  number.  It  is  not  at  all  a  satisfactory 
figure  to  compare  with  the  figures  of  tlie  Bulletin  dc  la  Statis- 
tiquc  Gi-ncralc  dc  la  France,  which  begin  with  tlie  third  quarter 
of  I'.tKi.  But  it  may  be  worth  something  for  this  comparison. 
The  figures  of  the  Bulletin  dc  la  Statistique,  compared  with 
the  figures  for  English  prices  of  the  Statist  (Sauerbeck's  series), 
both  reduced  to  a  base  of  loni-ioio.  are  as  follows: ' 

FRANCE 
1901-1910    1912      1913      1916      1917      1918 

Entire   period    100        118        116        ...         •••         •■• 

1st  .luartiT ^»        ^ 

2<1  quarter ■■•  ^/         •»»* 

-?<!  'litartiT 215         Alb 

4th  quarter 229        ii9 

UNITED  KINGDO.M 
1901-1910    1912      1913      1916      1917      1918 
Entire   period    100        116        116        ...         ...         •-, 

2<1   quarter •••         j,^        260 

3d.|U.rter >«|        ^j^  • 

4ih  quarter ^^        '^^ 

There  is  a  pretty  close  convergence  of  the  estimates  of  the  two 
French  authorities.  The  rise  over  l!)i;{  of  the  general  whole^ale 
index  number  of  the  Bulletin  de  la  Statistique  is  alK)Ut  s.%  per 
cent  for  the  third  (juarter  of  lOKi.  The  rise  for  wholesale  prices 
of  exports  and  imports  estimated  by  the  customs  house  authori- 
ties for  the  first  threj  quarters  of  IIMC.  is  ab<nit  SO  per  cent. 
I'trli-ips  the  figures  given  will  .suggest  the  following  rough  gen- 
eralizations: prices  of  all  kinds  rose  rapidly  in  France  during 
r.tir,  and  subsequently;  prices  of  articles  of  import  rose  more 
rapidly  and  higher  than  other  pi  ices;  prices  of  articles  of  exjuirt 
wen-  JnwiT  than  other  prices. 

In  connection  with  the  great  rise  in  prices  we  have  seen,  it  will 
lie  interesting  to  .study  some  ol  llie  statistics  reganlin^  physKal 
quantities  <<\  ijoods  produced  or  imported,  and  to  see  something 

'  lulv,  l'M«,  piiRe  28';.  I  his  is  the  latist  nutnlxr  to  which  tin-  writer  lias 
lta<!  .teifss. 


Millet 

Kye 

Barlev 

Oats 

Utiintals 

Quintals 

Quintals 

Quintals 

1.554 

12.382 

11,014 

51.541 

1,490 

12.714 

10,437 

51.826 

1.353 

11.147 

9,758 

46.206 

1.098 

8,420 

6,920 

34,625 

1,079 

8.471 

8,331 

40,223 

879 

6.993 

8.980 

34,462 

tn  EKKhXTS  OK  THE  WAR  OX    MONEY,   CREDIT   AND  BANKING 

also  of  the  extent  to  which  economies  in  consumption  have  been 
made  use  ol,  voluntarily  or  otherwise,  by  the  French  public.  We 
shall  give  some  account  of  supplies  in  foods  and  in  coal  and  shall 
refer  lirietly  to  consimiption. 

The  following  figures  for  cereal  production  in  France  are 
given  out  by  the  Minister  of  Agriculture:  ' 

(In  thousands  of  francs) 
Year  Wheat 

Quintals 

1912  90,991 

1913  8(.,919 

1914  7<).9.?6 

1915  60,010 

1916  55.767 

1917  3»,482 

These  figures  are  ominous.  The  wheat  crop  in  1!)17  was  the 
most  deficient  in  fifty  years.  The  deficient  oat  crops  of  1017 
reflected  itself  l)y  January.  I'Jl.s,  in  an  extensive  slaughter  of 
horses.'  The  whole  drift  of  these  figures  would  lead  one  to 
expect  a  ilitninution  in  the  meat  supply  and  in  the  numbers  of 
live  stock,  whicli  of  course  are  dependent  on  cereal  food.  There 
has  l)een  a  marked  diminution,  though  it  has  not  been  so  marked 
as  the  reduction  in  cereal  production.  The  following  figures  will 
l)e  of  interest: ' 

Horses 

Deccmher.    1913    3  222 

July.  1917   2,282 

Tile  meat  proljlem  has  been  a  grave  one.  "he  whole  food 
problem  has  been  increasingly  grave.  Increa>mg  restrictions 
have  l)een  placed  on  restaurants  and  on  the  purcha>ev  of  private 
families.  Meatless  days  and  meatless  meals  have  l)een  trml.  milk 
has  bee  1  wholly  eliminated  at  times  from  the  menus  of  public 
eating  places,  even  when  mixed  with  coflfee.  the  numlier  of 
courses  has  been  limited — matters  which  American  newspapers 
have  found  of  interest  and  have  discussed  in  considerable  detail. 
The  end  of  I'M?  was  an  eN|HTi:iIIy  critical  period  in  the  matter 
ot  bread,  in  view  of  the  wholly  <li>api>i'iiiting  wheat  cm])  in 
Franci'  ;m<I  tlic  Milmiaritic  w.ir.     I'ligl.ind  came  to  the  rescue  as 

'  I.utvlim  /:'.  >M,)mi.f/,  Octdlicr  6.  191",  page  4%. 
'  //'/</.  laiuiarv  19,  191H,  ^,n^.,■  H3 
'  IHd.,  (I.t..l.(r  13,  1917,  p:iKf  5.(5. 


Mules 

Bovines 

Sheep 

Pigs 

188 

14,787 

16.131 

7,035 

ISO 

12.443 

10.586 

4.200 

FRANCE 


77 


far  as  she  could.  America  with  a  short  wheat  crop  had  not  the 
ability  to  do  as  much  as  in  previous  years,  despite  the  restric- 
tions in  America  and  the  vigorous  efforts  of  Mr.  Hoover.  The 
normal  wheat  consumption  in  France  is  500  grammes  per  day 
I)er  person.  As  a  result  of  desperate  efforts,  it  was  possible  by 
January,  l!»ls.  to  get  the  supplies  in  France  back  to  a  jwint  where 
:;(M>  grammes  per  tlay  could  be  assured.  Switzerland,  meanwhile, 
had  only  ISO  grammes  per  day,  and  England,  between  225  and 
•2'>'j.  England  was  exceedingly  generous  to  France.  The  Eng- 
lish recognized,  however,  that  the  habits  of  the  French  people 
made  bread  a  much  more  important  part  of  their  diet  than  was 
the  case  in  England.'  Food  conditions  continue  ver>'  bad,  even 
chaotic,  into  the  summer  of  1918,  and  further  restrictions  are 
being  increasingly  applied. 

A  similar  story,  though  one  of  intensified  degree,  may  be  told 
of  coal.  French  coal  production  was  terribly  cut  at  the  outbreak 
of  the  war,  as  Germany  seized  the  liest  mines.  Throughout  the 
war,  England  has  been  helping  her  to  the  best  of  her  ability. 
The  submarine  war  made  this  increasingly  difficult.  French 
domestic  production,  though  cut  heavily  at  the  outset,  has  in- 
creased decidedly  since  the  early  days  of  the  war.  As  we  have 
seen,  about  two-thirds  of  the  normal  production  was  checked  by 
the  German  invasion.  Of  the  mines  remaining  in  French  hands 
the  production  was  further  cut  by  the  mobilization.  In  August, 
1915,  there  was  still  a  labor  shortage  of  40  per  cent  in  the 
mines  left  under  French  control.  By  the  end  of  1917,  however, 
the  production  of  these  same  mines  was  40  per  cent  above  the 
prewar  normal.  With  all  that  both  France  and  England  have 
been  able  to  accomplish,  however,  the  coal  supply  of  France 
remained  in  1917  and  early  1918  about  where  it  had  been  in 
191ti.  nearly  one-third  below  the  amount  normally  consumed. 
(The  normal  consumption  is  about  5,()()().0()0  tons  per  month. 
The  19115  consumption  was  3,300,000  tons  per  month.)  " 

As  has  l)een  stated  before,  191(>  was  the  period  of  greatest 

'  Ltmdon  llconomisi,  November  17,  1917,  page  806;  December  8.  1917,  page 
"»1.^;  Felini.iry  2,  1918,  page  159.  See  Journal  Officiel,  December  5,  1917,  for 
details  of  the  rationing  plan. 

'  I  ondoii  Economist.  M.iv  5,  1917,  page  776;  M.iy  27.  1916,  page  1019: 
Sepiv-mlKT  12.  1917  page  424:  September  8,  1917,  page  357:  June  Zi,  1917, 
paKf  1154;  annual  reports  of  the  Banquc  dc  France,  for  the  war  period. 


78  KI-l-KCTS   OV   TIIK.   WAR   ON    MONEY.    CRKOIT    AND   BANKING 

luxury  in  l-rancc.  Ilirouphout,  the  peasants  appear  to  have  been 
thrifty.  Tlicre  are  constant  references  to  the  hoardiii};  of  bank 
notes  in  IVance  tliron},'liout  the  war  as  a  matter  involving  bil- 
lions of  francs.  Numerous  other  classes,  particularly  the 
rrnticrs.  those  living  on  tixed  incomes  from  investments,  have 
been  exceedingly  economical.  P.ut  in  France,  as  in  other  coun- 
tries (though  it  does  not  appear  that  the  thing  has  gone  as  far 
in  France  as  it  did  in  (iermany  or  as  far  as  in  the  United  States 
in  llMi! )  those  classes  who  have  profited  most  by  the  war  indus- 
tries ap])e;ir  to  have  spent  money  freely  in  luxurious  consump- 
tion. The  laborers  have  done  this,  particularly  the  female 
laborers  and  the  entrepreneurs  who  had  war  contracts  or  who 
shared  in  tlie  prosperity  growing  out  of  the^e  contracts.  There 
w.is  a  great  increase  in  the  consumption  of  tobacco,  especially  in 
lii])es,  during  liMtl.'  There  was  also  a  great  increase  in  importa- 
tions of  .\mcric;m  automobiles,  other  than  those  used  for  war.'"' 

There  was  a  good  deal  of  talk  about  this  in  France  and  various 
efforts  were  made  to  enforce  economy,  as  well  as  to  shame  the 
people  into  it.  .Some  ol'  the  methods  of  coercion  have  all  the 
legal  indirectness  of  .\merican  constitutional  law.  Thus,  there 
was  a  prohibition  on  tlie  wearing  of  dress  suits  in  state  aided 
theaters.^  Coal  was  economized  by  various  measures,  including 
early  clo.sing  hours  for  restaurants,  limitations  on  lighting,  etc. 
The  j)eople  did  not  take  kindly  to  these  measures  and  at  times 
o])enly  defied  the  restrictions  on  the  use  of  gas  in  their  own 
liomes,  wlun  it  was  a  matter  of  heat  in  the  midst  of  a  cold 
winter.'  Kill  b\  and  large,  there  is  not  evidence  enough  at  hand 
to  ju>tify  the  general  charge  of  extravagance  against  the  French 
peo|)Ie  at  any  stage  of  the  war,  and  barring  the  year  1!>U>  they 
may  even  \\e  credited  with  general  frugality.  Their  troubles 
were  real  troubles,  imavoidable  troubles,  in  large  degree,  and 
tlieir  high  i)rices  were  due  far  more  to  inevitable  scarcity  than 
to  ,i\-.  lidable  consumption.'' 

'  London  l.iniMimixt,  .AukilsI  12.  1916,  page  287. 

'  IhUl..  Iinii'  .V  K>1(.,  pano  KVo. 

'  Ihul..  Novi-irl.<r  25.  Vnt,,  p.-i^c  <X)8 

*  Ihid..    I"tl.r\i;irv   .V    I'M?,   p.nur    1K7. 

'  riu-  In^'TV  tiiM".  V.  1'uli  (-.'nil  into  i'licil  in  tlic  '■ini'iiur  "f  I'JtS,  prn- 
ilni'ol  iini'-li  Ir--;  iti.iii  w.i-  .'intiriii:  tid.  I'or  Inly.  I'>1K.  llio  actii.il  yii'Id  was 
ten   iiullifiii   frnno,  aK.iii'-t   an   fslimatfcl   yiilil  of   thirty-two   millions.     The 


FRANCE 


70 


The  question  of  causation  involved  in  these  price  changes  need 
not  detl.n  us  long  here.    We  shall  discuss^the  ^^--^l ;^eo  >^;^ 
war  time  prices  brietlv  in  connection  Nv.th  American  pnces  xvhere 
data  a^e  more  abundant.    The  present  monograph  ,s  chiefly  con- 
cerned with  history,  rather  than  with  theory,  nt  any  case.     It  .s 
ealv  enough  to  find  reas.,ns  connected  with  the  abundance  o 
Scarcity  of  indivi.lual  cummodities  which  indicate  the-  general 
direction  in  which  their  prices  will  have  to  move.     There  is  a 
great  scattering  of  prices,  son-e  rising  greatly  through  extreme 
tcarcitv  and  others  rising  little  ,f  at  all  because  abu".lant  m 
supply'     The  latter  category  grows  mcreasmgly  smah  a^  the 
vlr  goes  on  and  labor  scarcity  is  felt  in  every  held.     (.o„ds  of 
almott  all  kinds  in  l-'rance  grew  scarce,  there  was  a  R-e,.   ns 
in  the  values  of  g.ods  and  hence  a  general  ---"  ^^^      '  > 
urices     To  'liis  general  cause  there  mu.-t  un.lnnbtedls  be  ad  Id 
a  further  ri.se  m  prices  .lue  to  the  depreciation  of  the  franc.     1  he 
Bancue  de  I'rance  early  ceased  to  redeem  its  notes  .  n  dernand 
an.l  for  four  years  they  have  been  circulating  under  cours  /.m^ 
Prolonged  suspension  of  specie  payments  has  never  ^;^'  -    u   the 
hi.torv  of  mnnev  to  lead  bank  notes  to  .leprecate  below   tlu 
n.  minal  coin  equivalent.'     It  is  not  easy  to  measiire  the  exten 
of  the  depreciation  of  the  notes  of  the  i5am,ue  de  France-.    1  here 
i.  n..  free  gold  market  in  France,  as  was  the  case  m  New  >i  ork 
luring  the  greenback  period  in  the  United  States.      The  .ore.gn 
exchanges  have  become  so  dislocate.l  that  the  rates  .;n  <l.fferent 
countries  tell  different  .tories.     We  .hall  have  occaM,  n  to  con- 
sider the  matter  in  connection  with  the  subject  o,  the  foreign 
exchanges. 

normally  bcc,  in  th.  tR-l.    -t    y'^''^'-,;",;;'^'" "',.*, ax  on  all  meals  cost- 
ever,  the  tax  ,.  ^'"<^V'T:..ri^v    V.na         c    -le  .' '  .li.-c  at  home  instea.l  of 

7r;:^'u,;:::ts'^";^:.'^^soA;^:^■n;.  ;^  ;;:,•  -; -1-^':;;;^^-^  p;.s 

London  r.c.uomisl.  .Ximnst  17   ''^'  !;';='  "'^  „,„„,,,  f„UowinK  1866    where, 
■There  .s  one  ""^  »' »'  "^     X' •;,  ;,.'^'';"  ,    .Ui.n-le-l  helow  the  value 
after  a  l'r-l'^".B<-'l  P.'V'"L' ''C,r     n/n    All     r  ol.  .rnnl.lc.  they   finally  appre- 
„f  the  silver  .n  whuh  ^hc^    ^  "        ""''•)^      \  .^^,,   „,^„,.    coM,p!icat.ons 

oiatc.l  above  the  vah.e  '.'' /'"' ,;l'^;,[;.  ,i"  ,J  j,,,  the  scope  of  this  pnpcr. 
here  an,l  a  ''-•;-;■'";:';-  J'Vvo  e!sor  TaugUn's  rn'-ir,//..  .■/  V.,..y 
^;i'!]Kt^;;-";;;  --'-l^n^slon  of  the  principles  involved  .n  chapter  .  of 
his  I'altic  of  Moiii-y. 


MlM 


MICKOCOPY    RESOIUTION    TtST   CHART 

ANSI  and  ISO  TESI  CHART  No    2 


1.0 


I.I 


I™ 


128 


132 


36 


.:  I 


2.2 
2£ 

1.8 


1.25   II!  1.4     i  1.6 


/APPLIED  INA^DE     he 

'f'i?     f']-»1     Mlit     -.fl-P* 


80 


EFFKCTS  OF  TlfK   WAR   ON 


VF.Y,    CRF.DTT   AND  BANKING 

There  is  a  turtlu-r  pussiljility  that  tjold  itself  may  have  depre- 
ciated durinjT  the  war,  which  would  add  a  third  cause  to  the  rise 
in  French  prices.  This  possihility  should  he  entertained,  since 
competent  writers  have  suRpested  it.  hut  we  shall  elsewhere  offer 
rcasitiis  for  re^^anlinfj  it  as  an  vr     r. 

By  the  fourth  (|uarter  of  11' ;,  French  wholesale  prices  had 
risen,  as  compared  with  l'.»i:{,  \u-2  per  cent;  Enj:^lish  wholesale 
prices  had  risen  only  114  per  cent:  wholesale  pi  ices  in  the  United 
States,  as  sliown  l)y  the  ilureau  of  Lahor  Statistics  index 
number,  had  risen  nnly  s]  per  cent  hy  Decemlier,  111  17.  The 
writer  ventures  the  general  thesis  that  at  this  period  the  rise  in 
prices  in  the  I'nited  States  was  wholly  a  matter  of  increased 
values  of  poods,  currency  depreciatii/U  being  non-existent;  that 
for  Great  Britain,  tiie  ri^e  was  chiefly  a  rise  in  goods,  with  cur- 
rency depreciation  slight ;  that  for  France,  there  was  a  still 
greater  rise  through  scarcity  in  the  values  of  goods,  but  that 
even  so  the  element  of  currency  depreciation  was  large. 

A  great  many  details  for  individual  commodities  and  classes 
of  conmiodities  may  be  found  in  the  Bulletin  dc  la  Statistiquc 
GcHcralc  dc  la  France,  especially  after  July,  I'.tlt!.  These  de- 
tails are  for  the  most  part  unsummarized.  except  for  the  general 
index  numbers  given  aljove.  Such  examination  as  the  writer  has 
had  time  to  give  to  them  will  justify  the  general  conclusion  that 
the  rises  are  in  considerable  measure  correlated  with  variation 
in  supplies,  and  that  they  are  very  uneven.  Professor  I^ughlin 
has  summarized  certain  of  the.se  figures,  taken  from  the  Bulletin 
of  July,  li»l»;  (pp.  ;50rt-;n2)  in  the  following  table:  ' 

RISE  OF  PRICES  IKOM  .MIDDLE  OF  1914  TO  .MIDDLE  OF  1916 

Per  cent 

FreiKhts    300-400 

Chemicals    1,^0 

Fodder   (Paris)    74 

VeKetabIc  oils    (  Pari» ) 1 16 

Metals  (  Pans )   70 

Coltcm   yarn    ( Kmicn ) 47 

Grains  (  Paris )    64 

SuKar.  rice,  etc.  ( rinrdcaiix ) 217 

Silk  ( Lvnn« )   ,](, 

rnttoii,  wool.  leatluT,  etc,   (Havre) 67 

'  l-aughiin,  o(>.  ai.,  page  18>1.  note. 


FRANCE 


81 


Professor  Charles  Gide,  writing  in  April.  1910,  places  the  rise 
in  French  prices  at  :):>  per  cent,  against  a  rise  of  :>()  per  cent  in 
England  and  a  rise  of  1(»0  per  cent  in  Germany.  Gide  does  not 
give  his  sources.' 

■  For  Gidc's  discus-i.-ii,  see  Kirkaldy:  Labour.  Finance  and  the  War.  Lon- 
don. 1916,  pages  251-253. 


if 

; 

\ 

,    > 

m}' 

Wm 

CHAPTER  VI 


The  Effects  of  the  War  on  the  Medium  of  Exchange  in 
France:  Coin,  Bank  Notes  and  Checks 

At  tlie  outbreak  of  the  war.  gold  money  in  I'raiice  quickly 
(li>a])i)eare(l  from  circulation.  1 'ranee  had  had  a  large  circula- 
tion of  gold  coin  and  also  a  large  volume  of  silver.  The  silver 
franc  and  live  franc  ])ieces,  though  no  longer  issued  under  free 
coinage,  had  unlimited  legal  tender  privilege,  not  only  in  l-'rance, 
hut  aNo  through  the  otiier  countries  of  the  Latin  Monetary 
Inion  :  Switzerland,  Helgium,  Italy  an<l  (ireece,  while  the  silver 
coins  of  the-e  countrie-  had  the  same  privilege  in  France.  How 
nnu-li  gold  was  in  circulation  hefore  the  war  is  dititlcult  to  say. 
W  idely  \ary:ng  estimates  are  given  I)y  1-Vench  writers,  (iide 
thinks  that  fi.iMio.noo.nuo  francs  in  gold  were  in  circulation.' 
riiis  seem-  incredihie.  The  (io\ernor  of  the  lianipie  de  l*"rancc 
e>timati(l  in  I'.mis  that  I'rance  had  from  "i.KOO.oou.odO  francs 
Id  c.noo  nuu.niMi  in  o, ,ld.  ,,|'  which  the  I'.aiupie  held  ahout 
;;,j(ii),non.o(in,-  leaving  .adv  aiiout  l.vtM».U(»(l,(MM(  to  2,MiO,ll(M),()(»0 
for  t;iiier:il  circulation.  The  gold  holdings  of  the  Banquc  iii- 
crc,i-(d  snhstantially  after  I'.'h>,  and  presumahly  also  the  gohl  in 
circulation,  I'.dmond  Tlury  '  estimates  the  total  gold  money 
I  coin  and  hnlliou  )  in  Ir.iiue  at  7,  1">7,«mm),(I(M>  francs  in  r.tl2. 
Ivajihat  !-•  ii'  rgi-  I.t'\y  e-tiinates  the  golii  in  |-"rance  at  the  out- 
lireak  of  the  u.ir  at  al'int  seven  billions,  of  which  four  billions 
were  in  the  hand-  <'i  the  ilruuiue.  and  three  billions  in  the  h.nids 

'iiili,  t  li.iili--  "  l>^ni-.  lit  r,i|.ir  Mriiuy  in  I'r.itui',  and  I'riri -."  in 
Kirk.ililv'-  \ipliimi  mi  I  ,t'n'ir,  /ii.iii,,,-  iiiui  lit,-  ll'ai,  juililislml  liy  aulln'iit^ 
lit  till  r.riii-li  \sM,i  i.itii  ■!  fir  tlu'  \iK  .iikuMi  lit  iif  Sciiiu-f,  I.iinilnii.  iiiwlatt-d 
'  ilali  in  ircf.icc.  \ii>;u-t.  I'ljio,  i)ii;i-  .'.^1-J52.  h  mi!\is  rlcir  that  '  liili' 
I'.m  'i,it  lif  lalkiiiy  aliiiiil  iIk-  lutal  am.  mil  nf  iruM  niniu-v  i'l  I'rain'i-,  in.  tmliiiB 
the  liui  Miu-  I'l  nil  liaiii|iH'  m  I'ratuT.  lir-t,  liiciii'-i'  ttir  i-iy  tiillin'is  !•.  tnf) 
•iiii.ill  tur  lliat.  a':i|.  -.ii'ii'iil.  Ii(i-aii>i  In  ^tati  s  r\|i|i,-it1\  lint  lir  t'-  cvtimatimr 
till  iiiMiirv  111  I  iri  hAi/ii'ii,  in  tlic  tlTuri  to  (Utirininc  wlu'tluT  from  a  <niantity 
llu'ury   vlLWiinint   tlurt-  is  "  inllatimi." 

'  I.aiiuMiii.  .'f.  cil..  iiai'r  171 

'  i.omloii  /.,  imimhiia/,  Mai>Ii  _'.  I'llS,  fiaRo  ,W". 

8a 


FRANCE 


83 


of  the  people.'    Levy  is  undoulHecUy  one  of  the  very  best  authon- 
ties  on  French  money  and  banking.    Givhig  no  estimate  tor  the 
amount  of  silver  in  c.rculatum.  Levy  points  out  that  the  Banque 
had  about  TOO  million  francs  in  silver  at  the  begnmmg  ot  the 
war   of  which  it  had  let  half,  or  ;}r.O  nnllions,  go  mto  general 
circulation.    This  bv  the  summer  of  I'.n:,.    \^ery  earlv,  silver  as 
well  as  gold  began  to  be  hoarded  by  the  people.     Dir  Bonl.-    a 
German   financial  journal  of  high   standing,  estnn;ae>  that  by 
the  end  of  I'.'U  there  were  four  billion  francs  ot  '•  hanl  money 
hoar.led  in  France,  of  which  two  and  one-half  bilb<Mis  were  gol<l. 
and  the  rest,  one  an.l  one-half  billions,  silver.^     .\s  to  the  general 
fact,  namely  that  there  was  a  great  stock  ..f  gold  in  circulation  in 
France  when  the  war  began,  anyhow  over  two  billions,  and  that 
it  wholly  disappeared  from  general  circulation,  there  can  be  no 
doubt    "The  extent  to  which  silver  disappeared  is  a  little  le.ss 
certain,  but  there  seems  litde  .Umbt  that  at  present  there  is  litUe 
silver  in  current  circulati.m  in  France,  despite  a  great  deal  ot 
new  coinage  '  by  the  g.)vernment  during  the  war.  and  despite  the 
release  by  the  I'.an(iue  de  France  of  a  large  part  ot  the  silver  it 
had  held  in  its  reserve.     ( The  Reichsbaiik  early  released  all  its 
silver  in  (iermany.  recognizing  that  a  silver  reserve  was  an  anom- 
aly from  the  >tandpoint  of  the  gold  standard.^  ' 

'The  hoarding  of  silver  may  at  first  appear  to  indicate  a  very 
great  depreciation  of  the  bank  notes  indee.l.  To  the  strict 
"  metallisl  "  theory  of  moiiev.  which  sees  the  sole  source  ot  the 
value  of  paper  nmnev  in  its  prospect  of  redemption  m  lull  weight 
coin  and  whicli  would  explain  the  hoarding  ot  coin  m  a  period 
of  restriction  as  merely  due  to  the  operatiim  ot  Gresham  s  Law 
(that  only  the  cheai.esl  money  continue  to  circulate,  wlien  there 
are  several  kinds,  of  unequal  value,  any  of  which  may  U-  used  to 
pay  debts,  etc.).  it  would  seem  to  follow  from  this  phenomenon 

■••l-niK-li  M.m.\.  liai'lM.iK  au.l  linatKc  .luring  tin   Croat  War."  (.'""' '•''■'v 
J„unu,l  o,    /:o.m,;m,.<.   .\..vcinUr,   11»1S,  paK«-  "7-(>S. 

•    )  .■  lu>n.  ri-.l  an.l  .,rtv  fnnr  mVum  franiMi.  s.vcr  wore  "•^' ^■''     '       "   , 
„n  p:i  '  n-n  at  all  was  mmu.l  n.  that  year.     I....ulo„  lu.n„un,U.  .\.mu^l  U. 

'"'"l'>';T''/,f*  nf      Cf.  also   I..Nv's   artul.   in   tlio    Hoi '"''V' ","'^'!'M;'i 

N„',UiH.r    28,    1914.  W"    54.1-544,    on    money    in    hraucv,    TngUnU    a.ul 

(ierni.iiiy. 


84 


EFFECTS  OF  THE  WAR   ON    MONEY,   CREDIT   AND  BANKING 


that  the  l)aiik  notes  fell  in  value  below  the  value  of  the  bullion 
•content  of  tlie  silver  coins,  which  at  this  time  were  worth  as 
bullion  nnich  less  than  their  nominal  gold  equivalent.  During 
the  maintenance  of  the  gold  standard,  the  silver  in  France  had 
been  sustained  at  its  nominal  value  by  its  legal  relation  with  gold, 
but  after  the  suspension  of  gold  payments  by  the  P>anque,  the 
silver  coins  were  in  no  better  plight  than  the  bank  notes  from 
this  standpoint,  they  had  no  more  legal  tender  (piality  than  the 
bank  notes  had,  and  if  they  were  hoarded  and  disappeared  from 
circulation,  it  must  have  l)een,  from  the  standpoint  of  the  strict 
"  metallist  "'  theory,  liecause  their  imllion  content  made  them 
more  valuable  than  the  bank  notes,  which  would  indicate  that  the 
depreciation  of  the  bank  notes  was  very  great  indeed. 

Such  a  ])]ieiiomenon  did  indeed  occur  in  the  northern  States 
during  the  Civil  War.  In  \>*'r2,  as  soon  as  'he  depreciation  of 
the  greenback>  exceeded  three  or  four  per  cent,  it  became  profit- 
able to  take  silver  out  of  circulation  and  send  it  out  of  the 
country.'  When  the  greenbacks  reached  their  lower  levels,  even 
the  copper  coins  tended  to  disappear.  This  was  due  not  only  to 
the  depreciation  of  the  greenbacks,  but  also  to  unusual  demands 
for  copjier.  This  phenomenon,  the  disappearance  of  copper,-  ha;: 
also  occurred  to  some  extent  in  France. 

The  writer  does  not  think  that  the  hoarding  of  silver  in 
France  is  adecpiately  explained  by  the  "  metallist  "  theory,  or 

'  .\t  till'  niim  ratio  v{  16:1,  silver  in  the  United  States  was  utulervalued, 
the  world  market  ratio  (dominated  hy  the  mint  ratio  in  l-'rance)  lieing  a 
little  above  IS'.,  to  1.  No  silver  dollars  were  thus  in  circulation  at  all.  Hut 
sdver  half  flollars.  quarters  and  dimes  were  in  circulation.  By  the  act  of 
185J  their  wiight  had  been  reduced  seven  per  cent  below  the  weiRht  of 
silver  dollars  of  equivalent  amount  (i.e.,  ten  silver  dimes  weighed  seven 
jier  cent  less  than  one  silver  dollar).  They  thus  remained  in  circulation,  as 
ten  dimes  would  have  been  worth  only  about  ninety-seven  cents  in  (fold  if 
the  dimes  were  melted  down,  so  lonK  as  the  Rold  standard  was  maintained. 
(A  silver  dollar  would  liave  been  worth  about  $1.04  in  Rold.)  When,  how- 
ever, the  Rrcenbacks  became  worth  less  than  iiiiutyseveit  cents  in  Roid.  ten 
ilimes  or  four  (|narfers  or  two  half  dollars  in  silver  were  worth  more  than 
a  crecnback  dollar,  .ind  they  ilisappcared  under  Crc'^bain's  Taw.  The  paper 
fractional  currency  devised  to  reiitaci-  the  disappearinc  silver  is  one  of  the 
inlerestitiK  monetarv  features  of  ttie  Civil  War  period.  For  a  detailed- ac- 
count of  this  episode,  see  VV,  C.  Mitchell's  Hislnry  nf  ihr  CrcenhncKs. 

'  Lontloii  F,-.:r,imist.  November  20,  IQl.S.  pagp  S.Sf'i.  The  explnnatinn  of 
this  is  not,  aiipareiuly.  to  be  fonml  in  the  hiph  value  of  copner.  but  in  the 
doiirr  of  the  peasant  for  "hard  money,"  to  which  later  reference  will  be 
made. 


FRANCE 


85 


that  the  bank  notes  depreciated  at  the  beginning  of  the  war 
below  the  value  of  the  bullion  content  of  the  silver  coins.  The 
"metallist"  theory  probably  gives  a  virtually  correct  account 
of  the  greenback  episode,  though  there  are  complications  even 
there.  The  "  metallist "  theory  can  account  for  the  disappear- 
ance of  gold  coin  in  France.  But  for  the  hoarding  of  the  silver 
somewhat  more  is  necessary. 

And  first  let  us  note  that  bank  notes  also  were  hoarded  to  the 
extent  of  billions.  Gide  estimates  that  perhaps  three  billions  of 
notes  were  hoarded  in  1910.'  The  hoarding  of  notes  in  the  ear- 
lier period  may  well  have  exceeded  this  substantially.  The 
hoarding  of  silver,  therefore,  may  be  viewed  merely  as  part  of  a 
general  hoarding  of  money  and  need  not  represent  a  distrust  of 
the  notes. 

That  all  kinds  of  money  should  be  hoarded,  gold,  silver  and 
bank  notes,  represents  in  large  degree  a  phenomenon  of  a  very 
diflferent  character  from  that  involved  in  Gresham's  Law,  as 
commonly  stated,  though  there  is  still  an  element  of  Gresham's 
Law  in  it.  It  represented  in  part  distrust  of  bank  deposits  in 
the  private  banks  and  a  preference  for  money  of  any  kind 
actually  in  hand  over  bank  deposits.^  This  distrust,  as  we  have 
seen,  was  justified  in  the  early  part  of  the  war.  The  banks 
except  for  the  Banque  de  France  took  advantage  to  the  full  of 
the  moratorium  and  depositors  were  able  to  get  only  very 
limited  amounts  from  them.  Naturally,  they  were  not  willing 
to  make  further  deposits  with  them  and  hoarded  what  money 
they  had  rather  than  redeposit  it.  But.  further,  money  ceased 
to  circulate  freely,  because  in  the  time  of  danger  and  uncertainty 
people  were  afrJid  to  spend  freely.  The  future  for  individuals, 
whatever  the  future  of  the  state  and  the  Banque,  looked  very 
dark,  and  men  who  had  resources  preferred  to  keep  them  in 
hand.  The  hoarding  represented  the  use  of  money  as  a  "  store 
of  value,"  and  as  a  "  bearer  of  optifms  "—men  needed  liquid 


^^ _  ^_^ This  may  not  be  meant  by  Gide  as  a  real  esti- 
mate, since'  iie  puts  il  in  hypothetical  f "rm. 


'  Gide,  op.  cit.,  page  252. 


ate.  since  ne  iiuis  ii  i"  ii>iiuiin.iiv.a. ....  i» 

"  I  e  in  terms  of  Gresham's  Law.  the  "  cheap  money  was  deposit  credit, 
and  it  tended  to  drive  the  "dear  money"  <gold.  silver  and  bank  notes)  out 
of  circulation.  But  this  is  only  a  minor  element  in  the  expl.nnation,  because 
of  the  great  difficulties  in  using  deposit  credits  at  all. 


SG 


liFFF.CrS  OF  THE  WAR  ON    MONEY,   CREDIT   AND   BANKING 


resources  to  enai)le  them  to  sleep  at  nip;ht.  Tliey  needed  scinie- 
thinj;:  which  was  instantly  c<.nvertil)le  in  the  market  into  any- 
thinjij  which  they  might  happen  to  need — food,  railway  tickets 
if  flight  should  lie  called  for,  or,  if  they  chose,  unusual  bar- 
gains which  others,  harder  pressed  than  they,  might  throw  upon 
the  market. 

In  ordinary  times  these  functions  are  shared  witli  money  by 
many  other  things,  especially  deposit  credfts  at  the  banks  and 
securities  with  a  ready  market.  But  now  there  was  no  market 
for  securities  that  could  be  depended  on,  and  the  banks  were  not 
attractive  depositories.  When  the  sh(  rt  term  Treasury  notes 
{bans  i/i'  /((  defense  Uiitioudli)  of  ihe  I'-rench  (lovcrnment  began 
to  come  out.  this  hoarded  money  was  ready  in  adequate  quantity, 
since  the  people  had  confidence  that  the  state  would  really  pay 
them  and  tliat  they  could  market  these  Treasury  notes,  even  if 
nothing  else,  at  need. 

The  hoarding  of  silver  was  in  no  small  part  due  to  the  fact 
that  many  of  the  hoarders  had  comparatively  little  in  any  case. 
Gold  and  bank  notes  were  in  denominations  that  were  too  large. 
The  fact  tliat  some  peoi)!e  hoarded  siher,  moreo\er,  making  a 
scarcity  of  silver  in  the  daily  routine  of  life,  made  others  accum- 
ulate a  reserve  of  small  change  in  order  lo  en.nlile  them  to  make 
daily  purchases,  .\fter  the  people  began  tcj  give  up  their  gold 
to  the  Banque  de  France,  tlieir  hoarding  of  silver  increased." 
Silver  did  not  wholly  disajipear.  It  simply  became  exceedingly 
scarce  and  merchants  were  unwilling  to  I>re;ik  \n\U  of  large 
denomination  for  the  same  reason  that  merchants  in  America 
after  banking  hours  ofJen  refuse  to  do  so. 

RiU  tliere  is  a  further  point  of  signitic.nnce.  "  Hard  money  " 
has  a  reality  to  the  minds  of  most  people  in  b'nuice  wliich  .\meri- 
cans  perhaps  do  not  share.  Little  trained  in  monetary  theory, 
the  French  jicasant  and  workman  are  nearer  in  feeling  on  this 
point  to  tlie  attitude  of  the  Hindu  than  to  tliat  of  tlie  .\iiierican 
banker.  H.ird  money,  wiietber  gold  or  silver,  seems  to  them 
more  truly  money  than  jiaper  does.  Tliat  the  silver  had  in  con- 
siderable |)art  a  fiduciary  character  was  not  a  matter  of  common 

'  Loiuloii  r..-oiiomist.  OctnlitT  0.  191,=;,  pa«o  .S41. 


FRANCE 


87 


knowledge  in  France.    Indeed,  it  is  not  strictly  a  matter  ot  legal 
theory  m  I'rance.     The  silver  is  not  redeemable  by  law  m  gold. 
Indeed  the  notes  of  the  Banque  are  legally  redeemable  m  silver 
or  gold  at  the  option  ot  the  Banque  and  the  Banque  does  even  m 
ordinary  times  sometimes  protect  its  gold  supply  by  proffermg 
silver  and  charging  a  slight  premium  for  paying  gold  mstead. 
The  value  of  silver  is  upheld  by  the  value  of  gold  m  France  m 
ordinary  times.     The  two  are  tied  together.     But  they  are  not 
tied  together  bv  the  simple  direct  process  of  immediate  redemp- 
tion of  the  silver  in  gold.     It  is  more  a  matter  of  indirection. 
In  no  small  part  it  is  the  fact  that  a  limited  supply  of  silver 
is    available    for    uses    where    gold    would    otherwise    be    re- 
quired, which  constitutes  the  linkage  between  the  two  metals. 
From  the  fact  that  small  change  is  in  some  measure  a  necessity, 
from  the  fact  that  the  silver  coins  are  legal  tender,  from  popular 
usage  and  social  convention,   from  various   indirect  measures 
employed  where  necessary  by  the  Banque.  and  from  the  tac 
that  the  silver,  limited  in  amount,  may  be  used  where  gold  would 
otherwise  be  required,  the  silver  coins  have  attained,  and  stil 
retain,  a  value  well  above  the  value  which  they  would  have  if 
melted  down  into  bullion.     The  bullion  value  itself,  moreover, 
has  risen  during  the  period  of  the  war.    The  hoarding  of  silver 
therefore,  is  not  by  itself  significant  of  any  great  depreciation  of 

the  bank  notes  in  France.  ,     •     .   • 

Various  substitutes  for  coin  in  circulation  were  devised  ,n 
France  The  first  extraordinary  remedy  was  the  issue  of  legal 
ten.ler  currency  notes  in  small  denominations.  These  had  been 
prepared  before  the  war-a  forethought  in  which  France  was 
more  fortunate  than  England-and  were  immediately  sent  out. 
These  were  in  denominations  of  twenty  francs  and  five  francs. 
They  are  said  to  have  been  readily  accepted  by  the  people, 
although  they  were  slow  in  reaching  small  towns.' 

BoHS  (/.•  la  defense  uationale  were  issued  in  denominations  ot 
100  francs  :,oo  francs  and  looo  francs.    The  smaller  denomina- 
tions passed  at  once  into  circulation  to  some  extent  as  part  of  the 
normal  currency.    Military  requisitions  were  paid  partly  in  these 
■  London  Ecmomisl.  .XuKust  15.  1914,  page  321. 


?! 
^1 


88 


li  IIXTS  OF  THE   WAR  ON    MONEY.   CREDIT   AND  BANKING 


and  partly  in  legal  tender  currency  notes.  The  chambers  of  com- 
merce in  various  parts  of  France  issued  early  paper  currency  in 
denominations  of  fifty  centimes  p.nd  one  franc,  which  took  the 
place  of  small  silver.  These  chamber  of  commerce  notes  were 
secured  by  notes  of  the  Banque  de  France  deposited  with  the 
Banque  dc  I'rance.  They  were  supposed  to  circulate  only  locally 
and  one  had  difificulties  with  them  outside  their  neighborhood. 
Proposals  were  made  in  11>17  that  these  be  replaced  by  notes  of 
the  same  value  to  be  issued  by  the  Banque  dt  France,  the  reasons 
for  the  proposals  being  that:  (1)  the  monopoly  of  the  Banque 
would  thereby  be  preserved,  and  (2)  the  notes  would  thereby 
have  a  wide  currency.  The  Minister  of  Finance  objected  to 
this.  He  preferred  that  the  Banque  should  not  issue  small  notes. 
He  pointed  out  that  the  Banque  had  already  given  instructions 
to  its  branches  to  accept  and  call  in  such  notes  when  current 
outside  the  home  areas.  These  notes  are  cleared  at  the  Banque 
in  Paris  and  sent  back  to  the  area  of  their  origin.  The  British 
army  has  also  made  arrangements  through  its  Paymaster  General 
to  exchange  such  notes  in  the  hands  of  British  soldiers  for  notes 
locally  current.' 

In  an  earlier  section  we  have  di.scussed  the  view  that  checks 
have  been  little  used  in  France  and  that  the  bank  note  has  been 
the  chief  medium  of  exchange.  This  view  we  saw  to  be  in  large 
part  erroneous.  Checks  have  been  u.sed  and  are  used  in  France 
for  large  transactions  on  a  great  scale.  The  masses  of  the 
people  are  not  familiar  with  them,  small  tradesmen  object  to 
them,  rents,  taxes,  and  many  other  payments  which  would  ordi- 
narily be  made  in  this  country  by  check  have  been  in  France  made 
by  bank  notes  or  coin,  but  the  large  transactions  on  the  stock 
exchange,  in  wholesale  trade,  etc.,  have  been  handled  by  means 
of  deposit  credit,  frequently  employing  checks,  though,  to  a 
much  greater  extent  than  in  America,  making  use  of  the  bank 
transfer  as  a  means  of  payment. 

During  the  war  an  effort  has  been  made  by  many  agencies  to 
increase  the  use  of  checks  in  payments  in  France.    Reference  has 


I.oiulon   /'.r.iiiiiiiiist,   laniiii 
405:  Dfccmbcr  15,  1917,"  papc  950 


'.  .Taniiarv  16.  1915,  page  107:  .September  2,  1916,  page 
7,  pape  950. 


FRANCE 


89 


already  been  made  to  the  proposal  of  Raphael-Georges  Levy  in 
lyU  shortly  after  the  outbreak  of  the  war  that  bank  deposits 
be  mobolized  by  means  of  checks  "  good  only  through  the  clear- 
ing house  '■  accompanied  by  the  use  of  clearing  house  certificates 
to  be  used  in  payments  between  the  banks.    Levy  has  been  inter- 
ested in  this  matter  throughout  the  war.    There  was  an  interest- 
ing symposium  participated  in  by  Levy,  Picot,  Guyot  and  others 
on  the  check  and  deposit  system  in  May,  1916.  of  which  an 
account  is  given  in  the  Economistc  Fran^ais  of  May  29,  1916. 
Arrangements  were  made  permitting  payment  of  taxes  by  check 
under  orders  from  Ribot,  in  1916,  when  he  was  Minister  of 
Finance,  and  to  some  extent  payments  have  been  made  l)y  the 
state  by  "  crossed  "  checks.    ( Crossed  checks  are  common  enough 
in  London.     A  clieck  marked  by  two  diagonal  lines  across  the 
face  will  be  paid  by  the  bank  on  which  it  is  drawn  only  if 
presented  through  some  other  bank.    This  is  a  safeguard  against 
fraudulent  identifications.)     The  theory  of  the  crossed  check 
in  France  appears  to  be  that  if  the  state  pays  by  crossed  checks 
and  these  checks  arc  deposited  by  their  recipient,  the  transaction 
constitutes  a  payment  into  the  banks;  whereas,  if  the  state  pays 
by  bank  notes,  which  the  recipient  uses  for  general  purposes,  this 
constitutes  a  payment  out  of  the  banks.' 

The  view  seems  to  be  that  this  will  prevent  "  inflation."  This 
view  is  an  illustration  of  a  number  of  misconceptions  which  seem 
to  be  current  in  France,  regarding  the  difference  between  bank 
note  issue  and  the  deposit  and  check  system.  It  is  a  common- 
place among  American  and  English  writers  on  money  and  bank- 
ing that  the  difTerence  between  bank  notes  and  deposits  subject 
to  check,  when  the  bank  notes  are  issued  under  the  "  assets  " 
system,  is  largely  a  difference  in  form  rather  than  in  substance. 
Notes  and  deposits  alike  constitute  a  medium  of  exchange.  Notes 
and  deposits  alike  tend  to  grow  out  of  the  lending  operations  of 
the  banks.  Notes  and  deposits  alike,  so  long  as  instant  redemp- 
tion in  gold  is  assured,  tend  automatically  to  expand  and  contract 
with  the  needs  of  trade  and  finance,  and  deposits  may  expand 

■London  Economist.  April  15.  1916,  page  711.  C/.  "«""™-  ^e  ^=''^";,^"! 
dcs.lcpe.ises  d'Ktat  ct  dcs  departments  par  des  virements  dc  banque. 
Economiste  Franfais,  August.  1916. 


90 


EFFKCTS   OF   THE   WAR   ON    MONEY,    CRKDIT   AND   BANKING 


quite  as  dangerously  as  notes  when  banks  cease  to  meet  their 
gold  obligations  and  when  they  surrender  their  lending  policy 
to  the  fiscal  needs  of  the  state.  There  is  no  magic  in  the  check 
and  deposit  system.    It  is  not  a  substitute  for  sound  finance. 

The  Bank  of  France,  through  its  director,  M.  Pallain,  in  I'.tUi, 
issued  a  booklet  containing  jiictures  of  check  forms  and  a  circular 
to  all  of  its  Iiranches  encouraging  the  use  of  checks.  It  sup- 
pressed the  conimissit)!!  charge  on  letters  of  credit  and  issued 
crossed  checl:s  without  charge  except  for  the  twenty  centime 
stamp.' 

The  Orleans  R.  R.  agreed  late  in  I'.tlU  to  accept  certain  kinds 
of  checks  at  the  stations  for  freight  charges  for  amounts  over 
two  thousand  francs  and  it  agreed  that  responsible  customers 
might  pay  every  ten  days  instead  of  daily  so  that  the  amounts 
might  reach  two  thousand  francs." 

Payments  of  interest,  where  the  bondholder  is  willing,  are 
being  made  by  book  transfers  by  the  banks  and  with  postal  orders 
for  small  bondholders.  The  postal  orders  and  postal  checks  have 
been  developed  in  France  during  the  war  and  about  tlie  end  of 
1017  a  law  was  passed  allowing  current  accounts  at  the  post 
office  with  arrangements  for  checking  and  for  transferring  credits 
from  one  account  to  another  by  orders  jjresented  to  the  post 
office.'' 

This  process  has  not  gone  on  without  friction.  Deposits  and 
checks  were  discredited  in  the  autumn  of  I'.tlk  Moreover,  the 
French  law  regarding  checks  was  veiy  little  developed  at  the 
outbreak  of  the  war.  It  was  necessary  in  the  summer  of  1916  to 
pass  new  legislation  making  it  a  criminal  offense  to  issue  checks 
when  the  drawer  knows  he  has  no  funds  or  to  withdraw  funds 
after  issuing  checks.  In  August,  lUlt!,  Lc  Temps  gravely 
discussed  the  question  of  stopping  the  payment  on  checks.  There 
had  been  a  court  decision  in  March  to  the  effect  that  this  might 
be  done.  Lc  Temps  contended  tha*  if  this  is  permitted  it  will 
make  all  the  agitation  to  extend  checks  useless  and  discredit  the 

'  I-ondon  I-.conomist,  May  6,  1916,  page  821. 
'Ibid.,  Doccmhcr  M.  1916.  page  1221. 

'  Ibid.,  Jaiiu:irj  19.  191M,  pagf  «S.i.  IJellom,  Le  ch'~(|iie  postale.  Journal  des 
hconomistcs.  July,  1916. 


FRANCE 


91 


instrument.     Lc   Temps  proposed    .o   ev^r.r!   the  law   against 
withdrawing  funds  after  giving  a  chec  ':over  the  case  of 

stopping  payment  on  checks,  making  stopping  payment  a  fraud." 

There  is  sufficient  evidence  in  this  new  legislation  and  in  this 
naive  attitude  of  Lc  Temps  that  the  check  is  not  a  familiar  thing 
to  the  masses  of  people  in  France.  More  recently  still  the  Banque 
de  France  has  seemed  to  change  i.>  attitude  toward  extending 
the  use  of  checks.  In  the  summer  of  1!)1H  the  Banque  laid  down 
the  rule  that  checks  will  not  be  accepted  in  payment  of  dues  to  any 
department  of  the  French  Government  unless  presented  on  the 
day  they  are  drawn.  This  would  seem  to  be  an  ingenious  device 
to  make  the  use  of  checks  impossible  in  payments  to  the  govern- 
ment. The  use  of  checks  has  also  met  a  snag  in  the  new  tax  on 
payments  of  all  kinds.  The  tax  amounts  to  two  francs  per  thou- 
sand on  receipts  for  money  payments  and  is  of  course  easily  col- 
lected when  checks  are  cashed  or  deposited  at  banks,  since  the 
check  is  a  receipt.  An  evasion  of  this  tax  has  been  devised  by 
creditors  drawing  checks  on  individual  debtors  instead  of  on  the 
banks  and  using  these  checks  as  a  means  of  paying  their  own 
debts— virtually  a  substitute  of  the  old  private  draft  or  bill  of 
exchange  for  the  bank  check.  A  bill  was  introduced  in  August, 
1018,  backed  by  the  Ministers  of  Justice,  Finance  and  Commerce, 
prohibiting  the  drawing  of  checks  except  on  bankers.  Agents  de 
Change  and  official  representatives  of  the  French  Treasury.  This 
is  designed  to  prevent  this  tax  evasion.- 

It  is  not  clear,  however,  that  this  may  not  prove  an  effective 
blow  at  the  widely  used  bill  of  exchange,  which  when  drawn  "  on 
sight"  is  legally  identical  with  a  check  drawn  on  a  private 
individual. 

Mention  should  also  be  made  of  the  extension  of  the  clearing 
house  system  during  the  war.  Before  the  war,  the  Chambre  d; 
Compensation  des  Banquiers  de  Taris  was  an  unimportant  aflfair, 
most  of  the  actual  clearing  operations  being  made  by  transfers 
on  the  books  of  the  Banque  de  France.  During  the  war,  a  new 
Caisse  de  Compensation   was   formed,   to  meet   the   needs   of 

'London  Economist  August  11,  1917,  page  209;  September  1,  1917,  page 
322 

'Ibid.,  .-Xiigust  17.  1918,  page  210. 


92 


EFFECTS  OF   THE  WAR  OX    MONEY,   CREDIT   AND  BANKING 


English  and  American  banks,  and  in  July,  1'.»17,  this  was  consoli- 
dated with  the  old  organization  in  the  new  Chambre  de  Compen- 
sation, which  includes  all  the  important  banking  houses  in  Paris. 
Its  operations  are  limited,  however,  and  the  overwhelming  bulk 
of  bank  settlements  continue  to  be  made  by  transfers  through  the 
Banque  de  France. 


CHAPTER  VII 

French  Fiscal  Methods  during  the  War 

The  financial  expedients  of  a  state  in  war  time  may  be  listed 
under  five  main  heads : 
I.    Taxes 
II.    Long  time  bond  issues 

III.  Short  time  Treasury  loans  issued  in  anticipation  of 

receipts  from  taxes  and  long  time  loans 

IV.  Direct  advances  to  the  state  by  a  state  bank  of  issue 
V.    The  issue  of  government  paper  money 

Between  the  last  two  methods,  when  specie  payment  is  sus- 
pended by  the  state  bank,  the  line  is  often  difficult  to  draw.  The 
issue  of  government  paper  money  as  a  means  of  meetmg  the  cur- 
rent expenses  of  the  state  is  generally  recognized  as  the  least 
desirable  form  of  financing;  the  last  resource  of  financial  weak- 
ness This  was  a  case  with  the  greenback  issues  of  the  ^orth 
during  the  Civil  War,  although  in  that  case  it  represented  finan- 
cial inaptitude  rather  than  real  Nseakness,  and  was  held  within 
reasonable  limits  after  a  strong  tax  and  loan  policy  was  begun. 
It  represented  much  less  weakness  than  the  advances  by  the 
state  banks  of  Russia  and  Austria  have  meant  during  the  present 

"^ ^During  the  present  war  the  doctrine  that  the  entire  expenses  of 
the  state  should  be  met  by  taxes  has  occasionally  been  stated. 
This  is  an  extreme  view  which  probably  today  has  few  if  any 
responsible  advocates.  It  is  impossible  to  carry  out.  1  he  theory 
underlying  it  is  that  the  essential  problem  is  a  problem  of  goods 
and  services:  that  the  amount  of  goods  and  services  available  is 
fixed-  that  tlie  problem  is  simply  to  divert  goods  ami  services 
frnm'private  to  public  use;  and  that  the  simplest  way  to  accom- 
plish this  is  for  the  state  to  take  private  incomes  and  spend  them, 
thus  reducing  private  demand  by  exactly  the  same  amount  that 

83 


9+  EFFECli    OF  THE   WAR  ON    MONEY,    CREDIT   AND  BANKING 

the  demand  of  *he  state  for  Roods  and  services  increases.  The 
difficuhy  in  applyiiifj  tliis  plan  jjrows  out  of  the  pre-existing 
fai)ric  of  deljts  and  credits  wliicli  would  promptly  he  thrown  into 
chaos  hy  any  such  drastic  reduction  of  private  incomes  as  the 
taxes  necessary  to  carry  on  a  great  war  would  involve.  Univer- 
sal Itankruptcy  would  result  from  it.  Instead  of  private  demand 
falling  off  in  proportion  to  the  increase  in  the  demands  of  the 
state,  private  demand  would  fall  off  very  much  more  than  state 
demand  increased  and  the  fiscal  receipts  of  the  state  itself  would 
he  very  much  less  than  the  taxing  authorities  might  anticipate 
for  the  very  simple  reason  that  bankrupts  can  not  pay  taxes.  The 
doctrine  is  further  wrong  in  its  assumption  that  the  volume  of 
goods  and  services  is  fixed.  It  is  probable  that  physical  volume 
of  production  in  the  I'nited  States,  for  example,  has  increased 
over  twenty-five  jier  cent  '  since  IIM  4  under  the  stimulus  of  ex- 
panding credit  and  rising  prices.  Under  ordinary  conditions 
there  is  a  large  >lack  in  industry.  There  is  unemployment,  there 
are  idle  plants.  There  is,  moreover,  a  large  industrial  reserve  in 
women  and  children  and  retired  laborers,  and  most  of  the  labor 
force  can  I)e  induced  to  give  more  overtime  work  than  it  is  ac- 
customed to  give  in  normal  times.  Rising  prices  and  interest 
rate-;  connected  v  ith  an  expanding  volume  of  war  time  demand 
can,  niiireiver,  induce  extra  saving,  especially  by  active  busi- 
nesses, and  increase  capital  accumulations. 

Further,  the  doctrine  that  only  taxes  should  Ix"  used,  ignores 
the  temporal  >ie(|uence  of  the  cessation  of  private  demand  and  the 
beginning  of  public  demand  for  goods  and  services.  If  the  state 
is  to  rely  only  on  l.ixes  it  can  not  spend  its  income  uiuil  it  receive.s 
it  and  it  can  not  receive  it  until  the  people  have  given  it  up.  The 
friction  of  tax  collection  m.akes  it  certain  that  a  considerable 
interv.il  will  intervene,  during  which  industry  slows  down  and 
becomes  demorali/ed. 

.\  recognition  of  the-e  diflimltii  •  has  led  rmfcssur  O.  M.  \\'. 
Sprague,  the  li'.iding  Nincrican  ;id\(icate  of  heavy  taxation,  to 
insist  that  the  tlr-t  reli.iiue  of  tlie  state  should  be  on  short  time 

'  Cf.  llie  |)ristiil  wrilir's  il'vcnssiim  <.f  ihi^  |Hinit  in  ttio  "  .\iiiiual  Review" 
of   I  III'  .liinalist.  .laiiiKi->   'i.   I">1''.  pHfi-is  5-<>  ami  i.l. 


FRANCE 


95 


loans,  issued  in  anticipation  of  taxes,  to  be  taken  largely  by  the 
banks.  The  advantage  of  such  short  time  financing  is,  first,  that 
the  state  gets  its  money  at  once  and  so  may  take  its  time  in  pass- 
ing tax  laws  and  collecting  taxes;  and  second,  that  an  easy  money 
market  is  created  by  the  expanding  bank  credit  connected  with 
the  larger  loans  which  tends  to  prevent  the  collapse  of  credit 
and  makes  the  shifting  from  peace  time  industrial  pursuits  to 
war  time  industry  easier. 

In  practice,  however,  even  a  policy  of  taxation  and  short  time 
loans  has  proved  a  counsel  of  perfection.  The  periodic  paying 
off  of  short  time  loans  by  receipts  derived  wholly  from  taxation 
would  still  impose  far  too  heavy  a  burden  on  the  existing  fabric 
of  debts  and  credits,  and  long  time  loans  in  large  volume  have 
proved  a  fiscal  necessity.  I  f  the  long  time  loans  are  taken  entirely 
by  the  people,  individuals  surrendering  their  current  income  to 
the  state,  the  difference  l)etween  loans  and  taxes  is  not  great. 
But  practically  the  people  can  not  make  such  a  complete  surrender 
of  their  incomes  and  the  difference  between  loans  and  taxes  lies 
largely  in  the  fact  that  a  government  bond  is  good  collateral  at 
a  bank,  while  a  tax  receipt  is  not.  The  bondholder  is  thus  in  a 
better  position  to  borrow  at  the  bank  funds  which  he  needs  to 
continue  a  certain  part  of  his  ordinary  expenditure  than  is  the 
tax  payer.  It  is  not  true  that  taxes  lead  to  no  borrowings  at  the 
banks.  In  lltlH  in  the  United  States  there  was  a  great  deal  of 
borrowing,  especially  on  the  part  of  corporations,  for  paying  the 
excess  profits  tax.  and  to  a  very  considerable  extent  the  bonds 
issued  l)y  the  federal  government  have  been  taken  up  out  of  the 
current  income  oi  the  i)eople,  reducing  pro  tanto  jwpular  expendi- 
ture and  consumption.  Hut  in  general  the  loan  policy  of  the 
government  Icails  to  an  increase  in  governmental  expenditure 
withmU  an  exactly  corresponding  decrease  in  private  expendi- 
tures, which  lends  to  raise  conunodity  prices.  This  increased 
exi)etidilure  at  ri>ing  prices  tends  also,  however,  to  increase 
aggregate  production,  and  in  this  fact  we  have  perhaps  its  great- 
est superiority  over  an  all  tax  policy. 

An  important  (jualification  nmst  be  made  with  reference  to  the 
doctrine  tliat  rising  prices  stimulate  production.     During  vnr^ 


96 


EFFECTS  OF   THE  WAR  OX    MONEY,   CREDIT   AND  BANKING 


191(5  and  I'.UT  this  was  clearly  true  in  the  United  States,  as 
shown  by  figures  for  railroad  gross  receipts,  bituminous  coal 
production  and  other  indicia,  but  by  the  middle  of  1917  progress 
slowed  down  decidedly.  The  country  had  nearly  reached  its 
maximum  capacity.  Further  stimulus  of  this  kind  would  have 
its  chief  effect  in  pull  and  haul  among  industries  competing  for  a 
relatively  inelastic  supply  of  labor  and  materials.  Xo  doubt 
there  is  still  some  slack,  but  no  amount  of  further  rise  in  prices 
or  expansion  of  bank  credit  could  duplicate  the  increase  in 
production  which  the  first  three  and  a  half  years  of  the  great 
war  brought  the  United  States.  The  desideratum  v  M  prob- 
ably be  an  increasing  substitution  of  taxes  for  loans  as  country 
approximates  its  full  industrial  capacity  and  as  the  .shift  from 
peace  time  industry  to  war  time  industry  becomes  more  com- 
pletely accomplished. 

Taxe.s  in  France 

In  France  it  was  virtually  impossible  to  adopt  a  strong  tax 
policy  at  the  outset  of  the  war.  As  we  have  seen,  France  was  in 
the  midst  of  a  severe  crisis  before  the  war.  The  budget  had  been 
del.iycd  for  several  months  by  a  bitter  struggle  over  the  income 
tax  and  the  tax  on  securities,  and  the  opposition  of  influential 
elements  of  the  population,  the  rentiers,  the  financial  press,  bank- 
ing houses  and  otliers  to  heavy  taxes,  was  a  matter  of  long  stand- 
ing tradition.  There  was,  moreover,  a  theory  in  France  that  war 
should  be  financed  by  short  loans  and  advances  from  the  Banque 
(as  had  been  the  case  in  1>>70)  and  that  permanent  fiscal 
measures  of  taxes  and  loans  to  retire  the  short  time  obligations 
sliould  be  put  into  etYect  only  at  the  end  of  the  war.  Further, 
the  inva-iiin  of  the  industrial  and  mining  sections  of  France 
robbed  Trance  of  her  richest  sources  of  current  revenue.  For  a 
long  time  after  the  outbreak  of  tlie  war  the  economic  demoraliza- 
tion, in  no  >niall  i)art  caused  by  the  moratorium,  made  a  strong 
taxing  policy  impossible,  and  the  political  difficulties  of  taxation 
per-isti'd  for  many  months  more.  Tlie  French  Ministry  of 
Fin.iiice  had  always  to  nckon  with  the  possibility  of  aggravating 
"  defeati>it  "  sentiment  by  vigorous  fiscal  measures. 


FRANCE 


97 


By  the  end  of  1914  the  yield  of  existing  taxes  was  38%o 
per  cent  below  normal.  Monthly  figures  for  many  months  there- 
after show  heavy  deficits.  September,  linO,  was  the  first 
month  in  which  the  tax  yield  got  above  normal.  The  revenues 
for  September,  1910,  were  340,000,000  francs,  49,000,000  above 
normal  in  September,  and  110,000,000  above  September,  1915, 
but  the  first  eight  months  of  1910  were  still  189,000,000  below 
normal,  although  494,000,000  above  the  first  eight  months  of 
191 T).  This  turn  of  the  tide,  however,  still  represents  a  deficit 
in  fact,  because  the  aggregate  of  taxes,  other  than  customs,  was 
still  below  normal  in  this  month  and  the  customs  receipts  repre- 
sented in  large  measure  payments  by  the  government  in  its 
capacity  of  importer  to  the  government  in  its  capacity  of  tax 
gatherer.  It  was  not  until  June,  1917,  that  the  tax  yield,  exclud- 
ing customs,  reached  the  prewar  normal.' 

Later  in  1917  the  total  tax  receipts  declined  somewhat  as  a 
consequence  of  the  falling  off  of  customs  with  a  restriction  on 
shipping,  but  receipts  other  than  from  customs  have  tended  on 
the  whole  to  increase  pretty  steadily.  An  income  tax  and  an 
excess  war  profits  tax  went  into  effect  during  the  year  1916  and 
additional  tax  legislation  was  passed  in  December,  1910.  The 
income  tax  passed  just  before  the  war  had  remained  in  abeyance. 
New  taxes  on  profits,  on  payments  of  over  ten  francs  and  on 
luxuries  went  into  effect  in  191S.  The  luxury  taxes  have  proved 
very  unpopular  and  their  yield  in  July,  1918,  was  less  than  one- 
third  of  the  yield  anticipated,  ten  millions  as  against  an  estimate 
of  thirty-two  millions.  Their  main  effect  has  been  in  checking 
luxury.  The  heavy  tax  on  meals  costing  over  five  francs,  for 
example,  has  led  enormous  numlwrs  of  people  in  Paris  to  dine 
at  home  instead  of  dining  at  restaurants.  The  total  tax  yield  for 
July,  1918,  was  472,000,000  francs.  This  is  20,000,000  francs 
below  the  estimate  for  that  month,  the  chief  deficit  being  in  the 
tax  on  luxuries.  It  is  40,000,000  francs  above  the  receipts  of 
July,  1917,  an  increase  of  9  per  cent. 

On  the  whole,  the  tax  policy  in  France  has  been  lamentably 
lacking  in  vigor.     As  compared  with  taxation  in  England  or 

'  London  Economist.  October  21,  1916,  page  686;  July  21,  1917,  page  86. 


JKS 


KKFECTS  OF  THE   WAR  OX    MONEY,   CREDIT   AND  BANKING 


taxation  in  tlic  United  States,  the  shnwintj  is  very  poor.'  For 
the  tirst  two  years  of  the  war  a  valid  defense  for  it  exists  in  the 
fact  that  nothing;  else  was  politically  or  economically  possible. 
Beginning;  with  the  summer  of  1!>10,  however,  it  would  seem  that 
much  heavier  taxes  could  have  been  imposed. 


BON.S  DE  LA   DEFENSE   NaTIONALE 

Apart  from  advances  by  the  Banque  de  France  the  main 
reliance  of  the  French  Government  at  the  outbreak  of  the  war 
was  shnrt  term  Treasury  bills,  the  so-called  "  bons  de  la  defense 
nationale."  These  have  been  purchased  steadily  and  cheerfully 
by  the  people.  The  great  private  banks  have  bought  them,  most 
of  them  placing  them  in  the  "  portfolio  "  in  their,  balance  sheets. 
Their  commercial  discounts  have  declined  heavily  and  they  have 
bought  a  considerable  amount  of  bons  de  la  defense  nationale 
instead.  The  Bantpie  de  France  rediscounts  them,  or  makes  col- 
lateral loans  against  them.  In  Fngland  and  the  United  States 
such  short  term  obligations  of  the  governments  have  been  taken 
chielly  liy  the  banks,  although  to  some  extent  large  tax  payers 
have  bought  them  in  anticipation  of  tax  payments  and  large 
corporate  and  individual  purchasers  of  long  time  securities  have 
bought  them  in  anticipation  of  the  long  time  issues.  In  general, 
in  Fngland,  France  and  the  United  States,  provision  has  l)een 
made  for  the  government  to  accept  these  short  time  securities 
in  payment  of  taxes  or  of  subscriptions  to  the  long  time  loans. 
The  smallest  denominations  of  these  bons  de  la  defense  nation- 
ale, thi  se  for  one  hundred  francs,  passed  to  some  extent  into 
general  rircul.'ition  and  all  of  them  represented  liquid  assets 
which  the  jieople  felt  safe  in  taking  in  exchange  for  their 
hoarded  goid  i.r  hoarded  bank  notes  which  they  were  holding 
for  emergencies.  The  first  i'^'^iie';  wee  at  •'  per  cent  for  three 
ami  >-i\  months.  By  December,  I'.'l  t,  the  rate  on  the  three 
inMnths'  iv-iics  wa>-  reduced  to  I  per  cent.  Bv  earlv  December 
over  seven  million  francs  "f  the<e  had  been  -old.  A  later  table 
will  -how  something  of  the  total  amounts  involved. 

'  F.vcii  GLriiriin  lias  cl.inc  hittir. 


FRANCE 


99 


The  Long  Time  Loans 


Early  in  1915  provisions  were  made  for  the  issue  of  long  time 
"  stock,"  but  it  was  not  until  the  fall  of  1915  that  long  time 
financing  on  a  large  scale  was  undertaken.  In  November  of  that 
year,  a  great  loan  was  lloated.  This  was  a  5  per  cent  issue  and 
was  marketed  at  eighty-eight.  The  receipts  at  this  price  were 
$2,648,600,000,'  or  nearly  13,250,000,000   francs. 

There  were  about  3,000,000  subscriliers.  As  a  means  of  pro- 
tecting the  3  per  cent  rente,  whose  price  had  sagged  to 
sixty-three,  sixty-four  and  sixty-five,  the  government  allowed  a 
certain  part  of  the  subscriptions  to  be  paid  in  the  rente  per- 
petuelle.  The  main  items  received  for  the  loan  of  November, 
1915,  were  as  follows:  ^ 

Cash    Fr.  6,360,000,000 

Bons  de  la  Defense  Nationale 2,228,000,000 

Rente  Perpetuelle  1,431,000,000 

Some  savings  banks  deposits  receipts  were  also  taken  and  some 
other  .minor  items.  The  rente  was  taken  at  an  arbitrary  price 
of  GO  as  against  the  bourse  price  of  64.50  on  November  ii3, 
but  was  accepted  only  for  a  part  of  each  subscription  and  had 
to  be  accompanied  by  new  money  or  national  defense  bonds. 
The  loan  was  open  only  fifteen  days  and  the  large  subscription 
was  regarded  as  very  gratifying.  The  position  of  the  Treasury 
was  greatly  strengthened  thereby. 

The  second  loan  came  in  November,  1916.  This  also  was  a 
perpetual  rente  at  5  per  cent  and  it  was  issued  at  SS.O.'i.  The 
total  subscription  to  this  loan  was  somewhat  less — about  $2,- 
275,000,000  or  about  11,360,000,000  francs.' 

Of  this  loan  55  per  cent  was  paid  in  cash,  whereas  of 
the  previous  loan  only  47'/(.  per  cent  had  l)een  paid  in  cash, 
the   balance   in   each   case  being   paid    in   various   obligations 

'  E.  L.  BoRart ;  Direct  Costs  of  the  Present  War,  page  19,  published  by 
the  Cartiegic  Kndovvmcnt  for  Intornational  Peace. 

'  London  Economist,  January  2Z,  1916,  page  141. 

'  RoRart,  of.  cit..  page  19 ;  London  Economist,  Xovembcr  25,  1916,  page 
998. 


100        EFFECTS  OF   THE  WAR  ON    MONEY,   CREDIT   AND  BANKING 

of  the  French  Government.  The  next  preat  loan  was  in  Novem- 
ber. 1917.  This  time  a  4  per  cent  perpetual  rente  was  issued 
at  OS.OO.  The  total  subscription  was  10.2.'')0,000.000  francs  or 
about  $2,0r)l. 000.000.  As  before,  a  substantial  part  of  the  loan 
was  paid  in  other  obligations.  The  government  had  asked  for 
only  2.000.000,000  francs  of  fresh  money,  but  in  the  actual 
payment  about  half  of  the  total  subscription  was  in  fresh 
money.' 

In  October,  101 S.  preparations  for  a  fourth  great  loan  are 
under  way.  The  l)ill  was  introduced  by  M.  Klotz,  Minister  of 
Finance,  on  September  18.  The  loan  is  to  be  a  4  per  cent 
tax  free  loan,  unlimited  in  amount.  It  is  to  be  issued  at  70.80. 
Subscriptions  will  be  taken  between  October  20  and  November 
24.  One  interesting  feature  is  that  Russian  coupons  will  be 
accepted  in  payment  up  to  r>0  per  cent  of  any  given  subscrip- 
tion.- The  French  Government,  since  the  collapse  of  the  Russian 
Government,  has  Ijeen  paying  the  coupons  on  Russian  state 
securities  and  this  is  merely  part  of  its  policy  of  protecting  these 
obligations. 

All  of  these  loans  have  been  essentially  funding  operations. 
The  government  has  gone  as  far  as  safety  permitted  in  the  issue 
of  national  defense  bonds  and  in  direct  borrowings  from  the 
Banque  de  France.  It  has  then  issued  a  long  time  loan  with 
which  it  has  somewhat  reduced  its  debt  to  the  Banque  and 
with  which  it  has  retired  a  large  part  of  the  short  time 
obligations. 

It  will  be  most  convenient  to  treat  the  advances  by  the  Banque 
de  France  to  the  government  for  war  purposes  in  our  cliapter 
on  the  Banque  de  France.  The  tal)les  which  follow  will  show 
the  proportion  which  such  advances  bear  to  the  total  revenue  and 
receipts  frnni  I<ians  of  the  French  Government.  It  is  interesting 
to  note  that  following  the  first  great  loan  in  Xovemhcr,  101,"., 
the  state  reduced  its  borrowings  from  the  Bamiue  from 
7,r.00,000,000  to  .^.ooo.ooo.ood  francs,  and  that  the  note  issue 
of  the  Banque  declined   about   2.">0,0()0,0(i(»  .,t   the  s.ime  time. 


'  Hos.irt.  ,>/■.  ,  ■/  .  iMur  20.     T.on.lmi  F(;n,o„}i.tt.  January  5.  1918,  page  13. 
•  Xc:f  York  Times.  September  19  iiiul  27.  1918, 


FRANCE 


101 


F(  Uowing  the  loan  of  November,  1916,  the  advances  to  the 
state  in  the  Banque's  balance  sheet  were  reduced  from  8,000,- 
000,000  to  6,600,000  and  notes  were  also  somewhat  reduced. 
The  effect  of  the  loan  in  the  fall  of  li)17  upon  the  Banque's 
balance  sheet  was  less  clearly  marked,  but  there  was  as  a  result 
of  that  loan  a  substantial  temporary  retardation  in  the  rate  of 
increase,  both  of  advances  to  the  state  and  notes.  By  August 
29.  1918,  advances  to  the  state  had  reached  19,1.50.000.000, 
while  note  issue  had  reached  29,4.34,000,000.  Since  about 
November,  1916,  these  two  items  have  kept  a  close  parallelism, 
remaining  just  about  10,000,000  francs  apart.  The  state  pays 
the  Banque  1  per  cent  on  these  advances.  Ihe  rate  is  to  be 
3  per  cent  after  the  war,  2  per  cent  of  which,  however, 
is  to  be  counted  as  a  sinking  fund  for  the  ultimate  extinction 
of  the  principal  of  the  debt.'  There  is  theoretically  a  legal  limit 
to  the  state's  borrowings  from  the  Banque,  but  practically  this 
limit  has  been  raised  by  successive  steps  whenever  it  has  been 
approached.  Commonly,  the  legal  limits  on  the  advances  to  the 
state  and  note  issues  have  been  raised  at  almut  the  same  time.  Of 
the  total  borrowings  of  the  state  something  less  than  20  per 
cent  had  been  borrowed  from  the  Banque  de  France  and  the 
Banque  de  I'Algerie  by  December  31,  1917,  as  will  appear  in  the 
tables  below.  At  the  outbreak  of  the  war,  however,  the  main 
reliance  was  on  the  Banque  de  France.  From  -August  1,  1914, 
to  December  31,  the  state  borrowed  twice  as  much  from  the 
Banque  as  it  was  able  to  borrow  from  all  other  sources.  From 
January  1,  1915,  to  May  15  of  that  year,  however,  the  tide 
turned  and  the  borrowings  from  other  sources  were  about  three 
times  as  great  as  the  borrowings  from  the  Banque."  It  is  in  no 
sense  true  that  the  main  reliance  of  the  French  Government 
has  been  the  Banque  de  France.  During  the  first  six  months  of 
1918  the  growth  of  the  advances  l)y  the  Banque  to  the  state 
was  very  rapid.  It  is  probable  that  this  had  some  connection 
with  the  expenditures  of  the  American  Government  in 
France. 

'  London  Economist,  December  21,  1914,  page  1112. 
'  Ibid.,  June  5,  1915,  page  1166. 


102        EFFECTS  OF  THE  WAR  ON   MONEY,   CREDIT  AND  BANKING 


The  following  tables,  prepared  hy  Professor  E.  L.  Bogart,^ 
are  the  most  authoritative  summary  the  writer  can  find  of  the 
main  elements  of  French  war  financial  history: 

EXPENDITURES  IN  FRANCE.  AUGUST  1,  1914-DECEMBER  31.  1917 
(In  millions  of  francs) 


Period 


Strictly 
Military 
Expendi- 
tures 
5.867 


Charges        Social  Other 

on  Debt     Ex,>.rM,-    Expendi- 
tures tures 


Aug.  1-Dec.  31,  1914 
Jan.  1-Dec.  31.  1915..  15.765 
Jan.  1-Dec.  31,  1916.  .23.673 
Jan.  l-l)ec.  31,  1917..   29.100 


Total  74,405 


60 
1,900 
3.267 
4,500 

9,727 


494 
2,711 
3.291 
4.200 

10.696 


167 
2,428 
2,402 
3,200 

8,197 


Total 

6,589 
22,805 
32,633 
41,163 

103,190 


RECEIPTS  AND  EXPENDITURES  OF  FRANCE 
AUGUST  1,  1914-DECEMBER  31,  1917 

(In  millions  of  francs) 

Period  Expenditures 

Aug.  1-Dec.  31,  1914 6,589 

Jan.  1-Dec.  31,  1915 22,805 

Jan.   1-Dec.  31,  1916 32.633 

Jan.   1-Dcc.  31,  1917 41.163 


Revenue  Receipts 
1,000 
3,884 
4,667 
4,730 

Loans 
6,365 
19.856 
27.429 
35.230 

Total  103,190 


14,281 


88,880 


TOTAL  BORROWINGS,  AUGUST  1,  1914-DECEMBER  31,  1917 
Treasury  hills,  etc Fr.  21.700,000.000 


5%  loan  of  1915. 

5%  loan  of  1916 

4%  loan  of  1917 

National   defense  ohiipations 

Bills  sold  in  England,  etc 

Loans  in  the  United  States 

.\dvancc  bv  I'nitid  States  Government   

Advances  from  lianks  of  France  and  .Mgeria. 
Additional  borrowings,  unclassified 


13.243.000.(X)0 

11,375,000.000 

10.256.000.000 

840.000,000 

7.340.000.000 

3.000.000,000 

6.425,000.000 

12,200,000.000 

2,500,000,000 


Total   Fr.  88.879,000.000 

This  is  an  enormous  war  debt   for  a  country   whose   total 

annual  income  l)efore  the  war  was  estimated  ;it  .'JO.OOO.OOO.OOO 

francs  or  $(i,noo,OO0,00n.     How  can  France  ever  pay  it?    The 

'  Oh  .if  fiacre':  20-21.  Professor  Rogart's  ficnres  are  given  in  dollars. 
Tlie  writer  ha';  rcronvcifcd  them  to  francs,  counting  five  francs  lo  the  dnl- 
1.1  r.  in  order  to  m.ike  Iheni  comparable  with  the  other  figures  given  in  the 
discussion  of  France. 


FRANCE 


103 


interest  charge  alone  would  make  up  a  large  fraction  of  the  pre- 
war national  income  while  a  rapid  reduction  of  the  principal 
would  seem  to  be  an  impossibility.  We  have  here  presented  in 
the  case  of  France  a  problem  that  all  the  belligerents  and  many 
of  the  neutrals  are  considering  very  solemnly  today :  "  How 
can  such  debts  be  paid  ?  "  If  the  interest  on  the  war  debt  had  to 
be  paid  out  of  the  national  income  as  it  existed  before  the  war, 
the  problem  would  be  indeed  a  serious  one,  perhaps  a  hopeless 
one.  But  consider — the  interest  paid  on  the  war  debt,  to  the 
extent  that  it  is  received  by  French  holders  of  the  debt,  is  an 
addition  to  their  incomes.  What  the  government  takes  out  of 
their  pockets  in  taxes  to  pay  the  interest  on  its  bonds  it  returns 
to  their  pockets  in  the  interest  that  it  pays  them.  Figures  for 
the  income  of  the  people  and  figures  for  the  budget  of  the  state 
are  thus  swollen  by  what  is  after  all  merely  a  transfer  of  funds. 
-Abstracting  from  foreign  debts  and  abstracting  from  the  fact 
that  people  who  receive  the  interest  on  the  war  loans  are  not 
exactly  identical  with  the  people  who  pay  the  taxes,  the  trans- 
action becomes  merely  a  bookkeeping  transaction.  The  burden 
of  the  war  is  after  all  borne  during  the  period  of  the  war.  It 
can  not  l)e  thrown  on  future  generations.  The  future  genera- 
tions are  of  course  poorer  to  the  extent  that  the  physical  wealth 
of  the  country  '  is  been  depleted.  They  are  poorer  to  the  extent 
that  the  lab.  jrce  is  depleted  by  deaths  and  sickness  and 
wounds.  The>  ire  poorer  to  the  extent  that  the  social  organiza- 
tion has  been  demoralized;  that  family  life  has  been  interrupted; 
that  the  education  of  the  children  has  been  interfered  with;  to 
the  extent  that  the  children  have  been  undernourished  and  be- 
come weaker  men  and  women  as  a  result.  But  the  mere  exist- 
ence of  a  huge  war  debt  owed  by  the  state  to  its  own  people 
does  not  constitute  in  itself  an  additional  burden  upon  the  coun- 
try as  a  whole. 

It  is  not  safe,  of  course,  to  abstract  from  debts  held  abroad. 
France  has  probably  been  changed  from  a  creditor  nation  to  a 
debtor  nation  as  a  result  of  the  war,  or  at  all  events  will  so  be 
changed  if  the  war  lasts  another  year  and  its  borrowings  from 
the  United  States  continue  at  their  present  rate.     The  loans 


104        EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT  AND  BANKING 

made  by  France  during  the  war  to  her  allies  are  much  less  than 
her  borrowings  in  uther  countries  unless  it  should  develop  that 
French  advances  tcj  the  United  States  Government  in  I'JIS  and 
1919  turn  the  scale. 

It  is  far  from  safe  of  course  to  abstract  from  the  fact  that  the 
people  who  pay  taxes  are  not  identical  with  the  people  who  receive 
interest  or  who  receive  payments  of  the  principal  of  the  loans. 
In  the  past  it  has  often  happened  that  a  war  debt  has  been  a 
crushing  burden  on  labor.  The  rich  have  lent  money  to  the  state 
and  the  poor  have  paid  the  taxes  with  which  the  loan  was  paid 
oft".  This  need  not  be.  With  the  growing  political  strength  of 
labor;  with  the  growth  of  income  taxes,  inheritance  taxes  and 
other  forms  of  taxes  aimed  chiefly  at  the  rich,  it  is  more  likely 
to  be  true  that  the  flow  of  funds  from  the  pocket  of  the  tax 
payer  through  the  Treasury  to  the  pocket  of  the  landholder  will 
tend  to  redistribute  wealth  in  the  interests  of  the  poor,  rather 
than  the  other  way. 

Nor  need  it  I)e  true  that  the  taxes  required  to  pay  the  interest 
on  these  loans  and  ultimately  to  amortize  them  will  be  a  handi- 
cap to  business  men  in  competition  with  the  business  men  of  other 
countries  where  the  tax  burdens  are  lighter.  Not  all  taxes  are  a 
burden  to  industry  and  trade.  Some  taxes  effect  prices,  others 
do  not.  Some  taxes  check  production,  others  do  not.  Taxes  on 
incomes  witliout  reference  to  their  source,  taxes  on  inheritances 
without  reference  to  their  manner  of  accumulation  and,  within 
limits,  taxes  on  land,  need  not  check  production  or  handicap 
trade.  If  France  does  not  become  insolvent  during  the  war  there 
is  little  reason  to  suppose  that  she  will  become  insolvent  after 
the  war,  and  to  the  present  writer  there  seems  litde  or  no  indica- 
tion of  any  real  danger  of  insolvency  either  of  the  French  Gov- 
ernment or  the  French  banks  during  the  war.  It  may  be  added 
that  even  insolvency  on  the  part  of  the  state  need  not  interfere 
with  its  continuance  as  a  fighting  power  if  only  the  state  is 
strong  enough  to  seize  by  direct  methods  the  physical  goods  and 
services  needed  for  the  continued  prosecution  of  the  war.  The 
Southern  Confederacy  was  virtually  bankrupt  for  two  years  or 
more  before  .\p])omattox.  If  vigorous  taxes  are  applied,  the 
problem  is  manageable. 


CHAPTER  VIII 


The  Banque  de  France  during  the  War 

At  various  points  in  the  foregoing  chapters  reference  has 
been  made  to  the  part  played  by  the  Banque  de  France  in  the 
financial  drama  of  the  war.  It  may  be  well  at  this  point,  however, 
to  summarize  some  of  these  points  and  to  deal  with  the  matter 
somewhat  systematically. 

The  Banque  de  France  has  played  a  great  and  heroic  role. 
Such  criticisms  as  may  be  justly  made  of  its  policy  are  also  criti- 
cisms of  the  state  and  of  long  standing  French  financial  tradi- 
tion. The  Banque  has  been  both  prudent  and  courageous.  It 
has  been  above  all  patriotic.  It  has  been  statesmanlike,  conceiv- 
ing its  task  to  be  to  lead  in  the  financial  and  industrial  readjust- 
ment which  France  has  had  to  make.  It  has  been  obliged  to 
carry  an  unexpected  burden  because  of  the  weakness  and  timid- 
ity of  the  great  private  banks  of  France  and  because  of  the 
inability  of  the  state  to  put  through  a  taxing  policy  of  sufficient 
vigor.  But  it  has  borne  this  burden  and  it  continues  to  be  a 
strong  and  solvent  institution  capable  of  bearing  even  heavier 
burdens  if  need  be. 

The  gold  policy  of  the  Banque  has  been  one  which  from  the 
standpoint  of  English  banking  traditions  is  not  courageous. 
Before  the  war  the  Banque  had  accumulated  an  enormous  re- 
serve, amounting  on  July  30,  1914,  to  4,767,000,000  francs.  Of 
this  700,000,000  was  in  legal  tender  silver  and  the  rest,  4,067,- 
000,000,  was  in  gold.  One  wonders  for  what  purpose  this  huge 
accumulation,  amounting  to  more  than  half  the  total  assets  of  the 
Banque  and  amounting  to  a  very  high  percentage  of  its  chief 
liability,  its  circulating  notes,  was  made,  if  not  to  be  used  for 
keeping  its  notes  convertible  in  an  emergency.  The  Bank  of 
England  with  very  much  less  gold  has  conceived  it  to  be  its  duty 
to  go  to  the  limit  in  meeting  its  gold  obligations  and  although 

105 


III 


106        EFKF.CTS  OF  THE  WAR  OX    MONEY,   CREDIT   AND   HANKING 

forced  to  exercise  control  over  externa!  shipments  of  gold  has 
apparently  never  refused  to  meet  lawful  calls  for  gold  over  its 
counter.  The  Banque  de  France,  however,  following  what  seems 
to  i)e  not  only  the  French  but  the  general  continental  tradition, 
proni])tly  suspended  gold  payments  at  the  outbreak  of  the  war 
and  has  since  hoarded  its  gold  jealously,  though  from  time  to 
time  sending  gold  abroad,  as  a  last  resort  and  under  special 
restrictions,  to  protect  the  foreign  exchanges.  Early  in  the  war, 
however,  the  Banque  released  .'5,"i(),()00,()fl()  francs  of  its  silver 
and  it  has  since  released  a  little  more.  Its  silver  holdings  in 
.■\ugusi.  l!tl^,  had  been  reduced  from  700,000,000  to  310,- 
(M »(»,(»( 10  francs. 

Farly  in  the  war.  .tlso,  a  nn^vement  was  inaugurated,  in  which 
Rajjliai'l-Cieorges  Levy  took  an  active  part,  for  bringing  in  the 
gold  lioarded  by  the  people  to  the  Bancpie  in  exchange  for  the 
Ban(juu"s  notes.  Levy  estimated  in  1  !•!,")  that  .something  like 
;{,0(Mi.(i(M),0(Mi  francs  of  gold  were  in  circulation  among  the 
peoi)lc  at  the  outbreak  of  the  war.  The  response  to  the  call  for 
gold  to  strengthen  the  Ban(|ue's  reserves  was  enthusiastic  and  a 
very  large  amount  of  gold  was  brought  in.  By  .August  lo,  lltl.j, 
;{1.">. 0(10,(10(1  francs  in  gold  had  I)ecn  brought  in  by  the  people  and 
by  Septeinlier  i'^,  I'.il.'i,  the  total  had  reached  HOO.OOO.OOO.' 

By  DecemlKT  s,  I'.tl.-.,  l,:204,00(».(i(i(l  francs  had  been  brought 
in  by  the  people.     Hy  Decemlier  is,  I'Jld.  the  figure  had  grown 

to   !.'.•  l>^,(iO(l.(MIO.- 

Tlie  K;in(|ue.  suspending  gold  payments  within  the  country, 
has  sent  a  good  deal  of  gold  abroad,  but  only  when  the  exchange 
situation  became  acute.  In  May,  l!*!".,  .'■.0(»,(l(IO.O((()  francs  of 
gold  w.is  exported  to  Fngl.and  under  an  agreement  by  which 
L.".."pO,(MMt,ooo  fraiic>  in  credit  was  obtained  in  luigland  and  the 
rnitfd  States  i  lie  used  in  |)rMtecting  l'"rench  iscliange.'  The 
I!an(pK'  retaineil  title  to  this  gold,  and  continued  to  count  ii  as 
part  'It'  its  re-erve  in  the  lir>t  ipiarter  of  I'.IM  more  wa-  sent 
nut  am!  tliroui;hout  tlu'  war  fmm  time  to  time  the  !'.an(|ue  has 
rele.ised  gold,  im  small  p.irt  of  which  ha--  conic  to  tlie  United 

'  L.MKltiM  lio'iiiiiiiisl.  Anuiisi   14.  Vi\S:  Octolier  J,  lyl.";,  naijc  508. 

"  //•!,/.  iHvcinl.iT  J,'.  \»\u.  rime  1176. 

■  lh>,l..  Mav  15,  I'n.'?,  vauv  'W. 


FRANCE 


J  07 


States.  This  gold  is  still  counted,  however,  in  large  part  at 
least,  as  part  of  reserve  of  the  Banque.  though  separately  men- 
tioned in  the  statements  of  the  Banque  since  June  H,  ])>1G,  as 
"gold  held  abroad. "  On  June  8,  litKI.  the  reserve  stood: 
silver,  3.")(i.(t()0.(»0();  gold  in  vaults,  4,(;7(!.000,000 ;  gold  abroad, 
69,000.000.  On  August  2L'.  I'JlS,  the  Banque's  reserves  stood 
as  follows:  silver,  31'J,000,000;  and  gold,  .5,4:5r).00(»,0O0,  of 
which  ;5,;J!)^H,000.000  was  held  in  the  Banque's  vaults  and 
2,o;J7.000,00O  was  held  abroad. 

It  is  not  clear  that  either  the  French  Government  or  the 
Banque  is  disposed  to  give  thorough  going  acceptance  to  the 
theory  that  gold  should  be  hoarded  in  war  time.  Perhaps  the 
theory  itself  is  too  vague  a  theory  for  public  men  'o  be  enthu- 
siastic about  giving  explicit  statement  to  it.  It  rests  in  part 
upon  the  notion  that  a  hirge  gold  reserve,  even  though  it  be 
hoarded,  is  a  basis  for  popular  confidence  which  helps  to  sustain 
the  value  of  circulating  notes  and  which  increases  the  general 
credit  of  the  state.  This  consideration  is  not  without  force. 
Confidence  based  on  the  existence  of  a  large  hoard  of  gold  is  to 
a  considerable  degree  nonrational.  but  very  many  of  tlie  forces 
which  make  for  value  are  nonrational.  The  notes  of  the  Banque 
de  France  have  a  higher  value  than  they  would  have  if  it  were 
not  for  the  Banque's  reserve,  even  tlu)u>,  .  a  lower  value  than 
they  would  have  if  they  were  Ijeing  redeemtd  on  demand  in  gold. 
The  decision  to  put  an  embargo  on  gold  was  one  to  which  Nibot 
gave  hesitant  assent.  Ribot  concluded  his  statement  upon  this 
point  with  a  panegyric  on  free  trade.'  He  appears  to  be  an 
adherent  of  the  Knglish  doctrine  with  reference  to  the  handling 
of  gold  reserves — the  doctrine  that  gold  reserves  are  to  l)e  u.sed 
rather  than  hoarded;  that  they  are  accumulated  in  trancjud  times 
])rerisely  for  tlu-  tneeting  of  emergencies.  lie  api)earcd  also  to 
feel  that  the  emergency  was  so  great  that  even  the  huge  hoard 
which  hrance  htid  accunnilated  wa>  madequale  and  that  it  was 
better  to  Cdiiserve  it  than  to  u.se  it  ineffectively. 

Tile  annual  report  of  tlie  Manijue  de  France  at  tlie  beginning  of 
lOlt!  di>icussed  the  matter  also.     The  Governor  states  that   it 


V  If ! 


I! 


i^i: 


London  Hciimnnist,  July  17,  1915,  page  98. 


108        EFFECTS  OF  THE  WAR   ON    MONEY,   CREDIT   AND  BANKING 

seems  not  wise  to  use  the  gold  reserve  freely  to  protect  the 
foreifjn  exchanges.  He  siig},'ests.  but  does  not  state  that  the 
effect  would  be  insufficient. 

There  may  have  also  l)cen  in  the  minds  of  statesmen  and 
financiers,  not  only  in  France  but  in  Germany  as  well,  the 
thought  I'lat  the  luige  gold  accunuilations  might  serve  for  some- 
thing more  than  a  fetish  for  the  people  to  look  at  and  draw 
comfort  from.  They  may  have  looked  forward  to  a  time  when 
credit  resources  would  be  exhausted  and  when  actual  gold  in 
hand  would  be  the  only  means  of  obtaining  goods  from  neutral 
countries,  the  time  when  the  country  with  the  largest  gold 
accuuuilation  would  have  the  necessary  supplies  in  the  tinal  week 
of  the  war.  No  doubt,  too,  all  of  the  gold  hoarding  financiers 
have  had  an  eye  to  the  advantage  of  a  huge  gold  accumulation 
in  the  after  the  war  period  as  a  means  of  aiding  in  a  resumption 
of  the  gold  standard. 

The  most  striking  developments  in  the  balarre  sheet  of  the 
Ban(jue  are  in  two  items  :  "  advances  to  the  str  for  war  "  and 
"  notes  in  circulation,"  with,  as  an  item  of  growing  importance 
after  .\pril,  11M.">,  "Treasury  bonds  in  respect  of  advances  to 
foreign  governments."  Notes  in  circulation  on  February  5, 
r.tU,  were  fi.tiJit.OOit.OOO  francs.  By  August  2!>,  I'.IIH.  they  had 
reached  the  huge  total  of  l'!I,4;J4,()()0,()()0.  "  .Advances  to  the 
state  for  war  "  were,  of  course,  zero  on  February  5,  lit  14,  but  by 
.\ugust  2!t,  litis,  they  -ad  reached  lil,ir.(1.0(Kt,()()0.  There  is  a 
striking  parallel  between  these  two  items.  They  have  steadily 
moveil  together  and  since  N'ovember  l>,   liHO,  they  have  l)een 

just  alM)ut   lo.nou. ),(1(m»  francs  ;ipart  pretty  uniformly.     The 

loans  to  the  g.vernment  for  advances  to  foreign  governments 
started  with  a  modest  l(t(i,(Mi(t,(tO()  francs  on  April  1.^,  litl.';.  and 
had  reached  :!,(•;;!, (mmimoo  by  August  Jit.  mis.  c'ounting  these 
two  items,  "  a'lv.uices  to  the  state"  and  "Treasury  bonds  in 
re>pect  of  aih.uices  to  foreign  goveruinents,"  the  state  was 
iiuiibted  to  the  l'>;in(|iie  for  war  purpo.ses  to  the  extent  of 
•_>L',i».',(t,(i(Mt,(io(t  francs  on  Auj^ust  -'it,  IHIs  (,,r  counting  five 
francs  to  the  dollar)  to  the  extent  of  $»,(t,".(),00(t,(t(M).  This  is 
by  far  the  greatest  part  of  the  total  assets  of  the  Banquc  which 


FRANCE 


109 


Stood  on  the  day  in  question  at  34,477,000,000  francs  or  nearly 
$7,000,000,000. 

To  many  writers  this  great  expansion  of  the  notes  of  the 
Bancjue  de  France  and  this  huge  figure  for  advances  by  the 
Banque  to  the  state  have  seemed  portentous  of  shipwreck  for 
French  finances  and  have  seemed  to  represent  a  degree  of  "  infla- 
tion "  far  in  excess  of  anything  discernible  in  England  or  the 
Unitc<l  States.  To  the  writer  the  situation  does  not  seem 
to  jje  hopeles..  The  actual  debt  of  the  state  to  the  Banque 
is  slightly  greater  than  the  amount  of  our  Third  Liberty  Loan. 
It  is  less  than  the  total  of  the  two  great  war  loans  in  uns  and 
r.tK;  in  France  by  about  1,000,000,000  francs.  Funding  opera- 
tions after  the  war,  whereby  the  debt  of  the  state  to  the  Banque 
will  be  changed  for  a  debt  of  the  state  to  the  people  in  the 
form  of  a  long  time  rente,  with  a  corresponding  reduction  of  the 
Banque's  note  issue,  will  not  be  easy,  but  will  Ije  perfectly  possi- 
lilc.  Tiiis  would  be  better,  from  the  standpoint  of  the  soundness 
of  French  banking,  than  the  slower  plan  of  a  sinking  fund  of 
2  per  cent  a  year,  which  was  planned  in  the  fall  of  1014,  at  a 
time  when  the  advances  to  the  state  were  not  expected  to  exceed 
six  billion  francs.'  The  state  pays  the  Banque  only  1  per  cent 
on  these  advances.  It  was  expected  that  after  the  war  this  would 
be  made  15  per  cent,  of  which  2  per  cent  .should  serve  to 
reduce  the  |)rincipal.  But  unless  speedier  methods  are  adopted, 
even  though  more  expensive  methods,  the  note  issues  of  the 
BatKjue  will  remain  so  large  that  resumption  of  specie  payments 
may  be  difficult. 

The  notion,  however,  that  bank  credit  in  France  is  danger- 
ously expanded  must  1m;  considered  in  the  light  of  the  facts 
developed  in  our  earlier  discussion  of  the  French  system  as  it 
existed  l)cfore  the  war.  France,  as  compared  with  England  or 
the  L'nitc<l  States,  was  to  a  large  extent  on  a  hard  money  basis. 
The  proportion  of  gold  reserve  to  extensions  of  bank  credit,  or 
even  to  notes,  current  accounts  and  deposits  for  all  I'rench  Ijanks, 
was  vastly  larger  than  the  same  proj)ortion  in  England  or  the 
United  States.  During  the  war  practically  the  only  expansion 
'  London  liioni'misi,  Uccemher  26,  1914,  page  1112. 


I 
I 

m 

■li 

1 


J 


1" 

li'i 


i'^ 


■■■!  \ 


110        EFFECTS  OF  THE  WAR   ON    MONEY,   CREniT   AND  BANKING 

in  France  has  been  in  the  form  of  notes,  as  we  have  in  part  seen 
in  the  section  dealin^^  witli  the  oiitl)reak  of  the  war,  aitd  as  will 
i)e  made  clearer  in  the  section  on  jjrivate  hanks  in  France,  livery 
private  hank  wliose  acconnts  tiie  writer  has  examined,  with  the 
exception  of  tlie  ci  im|)arativel\  nnimportant  Ban(|ue  Xationale 
de  Credit.  >hnw>  a  decided  fallinj,'  off  in  its  credit  exten>ions 
th!nn!j;h  most  oi  tlie  war  period.  The  total  volume  of  deposit 
credit  subject  t"  clieck  liy  others  than  hanks  in  France  is  proh- 
alilv  le-s  in  I'.Ms  than  it  was  before  the  war,  and  the  volume 
of  bank  acceptances  is  enormously  less.  The  current  accounts 
((■.eposits  suliject  to  check  or  draft)  of  the  ikuKpie  de  I'rance 
itself  have  expanded.  ihey  were  only  TKi,0(»(t,n(io  francs  on 
February  .".,  I'.M  I.  and  they  rose  to  :i,:!2S,(l(M>,(Ml()  by  January 
l''^.  r.»l.".,  reached  .;,<ii(i.(i(io.(t(M»  on  June  <i.  IIMS,  and  fell  to 
;t.r.  7.'l(t(>,(t(i(i  on  .August  I'lt,  UUS.  These  current  accounts  of 
the  r.an(|ue  de  b'rance.  however,  represent  in  part  accounts 
taken  away  from  the  private  banks  by  distrustful  depositors, 
ami  in  part  represent  the  hoarded  reserves  of  the  private  banks 
which  early  in  the  war  red'scounted  heavily  with  the  F?an(pie 
de  I'Vance  and  snli-eiiuently  •  .j^'ely  refrained  irom  lendinji;  out 
the  fund-  thu'-  procured,  y  ;  small  pan  of  the  increased  note 
i^sue  of  the  l'.an(ii;c  de  I'rance  has  thus  been  hoarded,  either  by 
the  private  liank-  or  b\  the  people. 

It  would  be  hard,  by  the  way,  to  <;ive  a  more  complete  refuta- 
tion to  the  theory  that  bank  loans  and  deposits  bear  a  definite 
relation  to  bank  reserves  than  the  history  of  France  durinj;  the 
jjreat  w.ir- — and  for  that  matter  the  history  of  I-'n^land  and  the 
I'nited  States — ;irtords.  The  l'>an(pie  de  France  has  exi)anded 
its  note  issue  and  de])osits  couraf.;eously  witliont  reference  to  its 
reserves,  to  meet  the  emerj^encies  of  t''^  situation.  The  other 
banks  in  f;ener;d,  countinf;;  ;is  their  reserve  lar;.;ely  bank  notes  and 
deposits  with  the  Manque  de  I'rance,  have  very  greatly  increased 
their  reserve  percentages. 

The  (ij,'nres  for  the  l'.an(|ue's  new  commercial  discounts  and 
for  its  ])remiiratoriiim  bill'-  have  alreadv  been  tre;ited  in  the 
chapter  on  "  Hepression  anil  Rrj^risc  dcs  A  if  aires."  The  P.anque 
took  over  .'Ui  enormous  vul'iiiii'  of  premor;Uoriinn  l)ills  from  the 
other  banks  at  the  outbreak  of  the  war  and  these  bills  have  larRely 


\u 


FRANCE  111 

been  paid  off,  declining  from  a  maximum  of  o, 771,000,000  on 
Xovemlicr  li',  V.m,  to  l,0lit5,000,000  francs  on  August  S,  IDIS. 
The  unmatured  hills  or  commercial  discounts  have  risen  from 
a  low  of  244,000,000  on  January  •2f^,  l[n:>.  to  a  high  of 
l,;j;i."( ,000,000  on  February  14,  I'JIS,  declining  again  to 
l,(»(ii',ooo,oo(»  on  August  S,  Ktls. 

Tlie  i]aii(|ue  was  perhaps  not  quite  as  courageous  as  the  Bank 
of  llnglaiid  in  rediscounting  for  the  private  banks,  but.  bearing 
in  iniiul  tlic  timidity  of  tlic  institutions  with  which  it  had  to 
deal,  it  i^ave  them  certainly  all  th.c  accomniddations  to  which  they 
were  entitled.  i'liere  was  some  complaint  in  the  fall  of  l!>14 
tliat  the  l)an(|ue  was  hesiiain  about  new  commercial  credits,  but 
on  llie  whole  its  policy  '>eenis  to  have  been  vigorous  enough. 
The  large  issue  of  new  bank  notes  by  the  l{an(|uc  de  France  was 
the  one  effective  stimulant  which  revived  1-rench  industry  and 
commerce  fr.in  their  syncope.  But  .stimulants  are  not  indefi- 
nitely effective. 

The  note  issue  of  the  15an(|ue  de  I'rance  has  always  been  virtu- 
ally free.  I'he  i;an(|ue  represents  the  primitive  type  of  bank  of 
is-iie.  When  sjiecie  payment  was  suspended  in  1S4S.  however,  a 
legal  limit  was  placed  uixm  the  i>sues,  and  since  the  suspension  of 
ls7i»  this  practice  has  remained.  The  legal  limit  has  always  been 
raised.  ho\'ever,  well  in  a<lvance  of  any  pressure  of  actual  issue 
of  notes  and  api)arently  the  main  reason  for  retaining  any  legal 
limit  at  all  has  been  the  desire  on  the  part  of  the  legislature  to 
bargain  wilh  the  Baiupie  in  connection  with  other  matters.  At 
the  outbreak  of  the  war  the  legal  limit  was  raised  from 
C.sO(»,ooo,ooo  t<i  1  J,oo<i,oo(t,(too  francs  and  it  has  subsequently 
been  raised  by  successive  steps  as  follows:  ' 

May    1915.  to   !■>•  lS,<K)0,(K)fl.()()0 

Mar     1916  1c.   18,(HH),(KI0,(HHI 

Ktl.  '  19i;  to   2I.0()(>.(I()(I,(I(H) 

Sept'    1917  to J4,(KKI,(1(M).0(K) 

Fcl.  '  vnn.  to  .'7.(KKMMHMHm 

M.iy,   1918,  to i(t.(KXI.(K)0,000 

The  note  issue  of  the  Banque  de  I'.Mgerie  has  been  raised 

during  the  war  fr.im  ;!00 .000,00(1  to  700,000,000  francs.' 

'  Ijindoii  /;c,i)iri>ni.((,  Iiliruary  Id.  1''I8.  paKC  ^40:  Hullflin  </.'  Slalislique  *l 
de  l.t-iiislalioit  C"wf^arf,\  May.  1918.  p.iKf  ^S}. 
'  HutUtin  de  SlaltsttijUf  .-«  de  IJgtstaiwn  Comfarec.  1918,  page  887. 


>ij|jll 


IK 


112        EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND   BANKING 

The  maximum  of  advances  of  the  Banque  to  the  state  on  the 
1  per  cent  interest  basis  was  raised  to  21,000,000,000  francs  in 
June,  lltl^.' 

Since  early  in  VM7  the  question  of  the  renewal  of  the  exclusive 
privilege  of  the  Banque  de  France  to  issue  notes  in  France  has 
been  under  discussion  and  the  del^ate  over  this  question  has  been 
l)itter  and  prolonged.  In  late  October,  litlT,  an  agreement  was 
signed  between  the  Governor  of  the  Ban(|ue  and  the  Finance 
Minister  renewing  tlie  Ban(|uc's  privilege  of  twenty-five  years, 
but  the  chambers  were  very  slow  in  ratifying  this  agreement.  In 
the  course  of  this  del)ate  many  interesting  discussions  of  various 
phases  of  French  money  and  banking  took  place.  The  policy  of 
tiie  private  banks  already  discussed  was  harshly  criticised  by 
defenders  of  the  Banque  de  France  itself,  particularly  their  policy 
of  discouraging  issues  of  French  industrial  securities  and  of  sell- 
ing to  the  I'rench  investors  many  tens  of  billions  of  second  rate 
foreign  l)onds.  The  main  controversy  over  the  renewal  was  be- 
tween the  socialists  who  wished  to  make  of  the  Baiujue  a  state 
institution  and  the  economic  liberals  or  individualists  who  prefer 
the  system  oi  private  enterprise  and  who  believe  that  the  credit 
of  the  15an(|uc  is  safer  if  it  is  left  free  from  state  control.  In 
the  course  of  the  ctmtroversy  the  old  argument  has  been  revived 
that  if  the  P>anque  de  France  remains  a  private  institution  its 
credit  would  survive  even  a  repudiation  by  the  state  of  its  debts 
— an  argument  hardly  valid  in  the  face  of  the  present  fact  that 
advances  to  the  state  constitute  nearly  20,000.000,0 ;)0  of  the 
state's  :5.-.,ooo,(iO(i,000  of  assets,  while  Treasury  bonds  taken 
by  the  Banque  in  connection  with  loans  by  the  government  to 
its  allies  constitute  three  or  four  billions  more.  On  July  :!0, 
r.M^,  the  Chatnl)er  of  Deputies  voted  tn  adopt  the  measure  for 
the  renewal  of  the  privileges  of  the  Banque  de  France  for 
twenty-five  years.^    The  vote  was  2;il  to  72. 

The  accompanying  table  shows  the  most  significant  changes  in 
the  balance  sheet  of  the  Banque  de  France  during  the  period  of 
the  war. 

'Tondo'i  Ff.uioml.ft    lunr  1.^.  191R.  paer  1010 

'  N'(i\  Norl-  \l,}iniiiii  Villi.  Inlv  .M.  101S  Sec  .ilso  I.niiiinn  pinnnwisl, 
Manh  .11,  1017.  paRc  586;  Nnvcmh.r  3.  1917,  page  732:  Julv  1.3,  1918.  page 
42.    .V.-«'  York  7  imcs.  July  \1.  1918. 


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CHAPTER  IX 


Private  Banks  and  Savings  Banks  in  France  during  the  War 


In  earlier  sections  we  have  descrilied  in  detail  the  character 
and  ojjerations  of  the  great  French  private  lianks.  We  liave 
seen  that  to  a  Iari,'e  extent  tlieir  (le])osits  re])resent  actual  savings 
Iiy  their  dejiositors  instead  of  iieing  the  cnnseiiuence  of  loans 
made  liy  the  hanUs.  and  that  in  very  con>ideralile  measure  their 
liusiness  has  consisted  of  selling  foreign  securities  of  tlieir 
depositors,  instead  of  ])romoting  the  industry  and  connnerce  of 
i'Vance.  We  have  seen  tile  ])oor  (jiiality  of  many  of  these  securi- 
ties and  have  seen  the  disastrous  results  that  came  from  this 
policy,  iioth  in  tlie  |)erio(l  immediately  ])receding  the  war  aivl  in 
the  period  that  followed  its  outhreak.  Overwhelmed  by  a  disas- 
trcnis  hreak  in  the  ])rices  of  the  securities  in  which  they  hail  been 
dealing  and  of  which  they  probably  held  'arge  amounts,  the 
great  ])rivate  banks  felt  tliemseKes  hel])less  wnen  the  war  broke 
out,  largely  ceased  lending  oi)erations.  rediscounted  lie;ivily  with 
the  l{an(|ue  de  I'rance  and  hoarded  the  proceeds  of  their  redis- 
coiuiting  o|)eratioiis.  The  first  reports  of  virtually  all  the  private 
banks  after  tiie  outbreak  of  the  war  showed  large  declines  in  their 
balance  sheets.  It  was  still  possible  for  most  of  them  to  show 
nominal  prolits  and  to  pay  divMeiids,  but  this  is  probabl>  to  be 
explained  by  the  fact  that  in  the  ])erio(l  preceding  the  war  they 
had  accumulated  large  reser\es  of  one  kind  or  another  which  did 
not  always  figure  in  their  balance  sheets.  The  L'omptoir 
d'l'.^ci'mpte.  which  had  had  a  profit  of  ls,(i(»(i,(iO((  francs  on  its 
llMo  operation^,  showed  profit  of  ll.ooo.doo  francs  on  its  r.»14- 
operatioi,^.  The  Credit  l.yonnais  had  had  profits  in  l!»i;5  of 
41.(».M>.(iiin  francs.  Its  I'.tl  1  profits  were  M.ono.ooo  francs.  Its 
l!tl;!  dividend  was  sixty-five  francs.  Its  r.il4  dividend  was 
twenty-five  francs. 

At  the  outbreak  of  the  war  virtually  all  tlie  private  banks  took 
advantage  of  the  moratorium  on  deposits.    On  January  1,  11)15, 

114 


FRANCE  115 

however,  the  Comptoir  d'Escompte,  the  Societe  Generale  and  the 
Credit  Lyonnais  ceased  to  avail  themselves  of  the  moratorium 
law.' 

It  has  not  been  easy  to  p^et  any  indication  of  the  extent  of  the 
losses  which  l-'rench  Ijanks  have  incurred  in  view  of  the  seizure 
of  their  branches  in  beliij^erent  countries.  Thus  the  T'anque  de 
Paris  et  des  Pays-Bas  in  a  recent  report  states  that  it  has  been 
unable  to  get  any  information  from  its  main  branch  in  P.elgium. 

Reference  to  the  chart  on  stock  prices  on  the  Paris  bourse  in 
our  chapter  on  the  bourse  will  show  the  course  of  shares  of  five 
great  private  banks.  They  have  declined  very  substantially  dur- 
ing the  war  period,  in  striking  contrast  to  the  sliares  of  the 
Banque  de  France  shown  on  the  same  chart,  which  have  risen 
very  substantially.  It  is  probable  that  provincial  banks  have 
gained  substantially  in  prestige  as  compared  with  the  great  pri- 
vate banks  during  the  war  period."  Virtually  all  the  French 
banks  have  been  forced  to  close  some  of  their  branches  through 
lack  of  personnel. 

The  following  tables  show  the  main  changes  during  the  war 
period  in  assets  and  liabilities  of  the  Credit  Lyonnais,  Comptoir 
d'Escompte  and  Societe  Generale : 

CHi'Dir  I.YO.WAIS' 
(In  millions  of  francs) 

1914  1915  1916  1917  1918 

Jan.  31     Nov.  30    Dec.  31     Dec.  31       May  8 
Assets 

Cash  in  vaults  and  in  the 
banks    202  820  689  618  806 

Portfolio    1,567 

Portfolio  and  national  de- 
fense bonds 991  1.191         1,671  l..';58 

.Advances  on  collateral,  and 
reports    329  229  228  198  192 

Cnrrent  accounts 743  432  406  450  133 

Total  assets   2,897         2,563         2,653         3,040  3,100 

I.IABI1.ITIKS 

n<  posits  974  699  70S  883  964 

Current   acocunts    1,259         1,206  1,246         1,497  1,465 

Acceptances  144  18  20  21  18 

'  U\il!  Strrcl  Joiiriuil  X,:^s  IhiU.-iin.  Wednesday.  December  30,  1914. 
'  I.oiulun  F.I  onomist,  .-XuRust  11,  1917,  |iage  209. 
_  "  \ll  tlu"^e  tables  are  made  from  the  balance  sheets  published  by  the  instittl- 
tions  in  o.uestion. 


?  I 


11  , 


116        EFFECTS  OF  THE   WAR  OX    MOXEY,   CREDIT   AXD  BANKING 


COMPTOIR  DESCOMPTE 
(In  millions  of  francs) 

*«„«                      '^'•'  '91-*  '*^15        1916       1917        1918 

"                     Jan.  31  Dec.  31  Sept.  30  Dec.  31  Dec.  31  Mar.  31 

Lash   in   vaults   and   in    tlie 

I'anks    137  .186  406        278         360         334 

I'.irtfolio   966  355 

I'ortfcilid    and    national    de- 

tVnso  bonds  598        916       1.338       1.349 

N'lvaticcs  on  scciiritit-   ....         235  224  172          139          li4           154 

Tnirtnt    amnnits     148  179  131         125          158          155 

T'tal   assets    1,826  1,347  1,491       1.755      2,265       2,240 

Lt.ABILlTIES 

Deposits    and    current    ac- 

,^""""''^  1.307  1,041  1,123       1,3.50       1868       1,831 

.Xcecptames    182  3Z  36           56           48            41 


SOCIfilfi  oeXfiR.ALE 
(In  millions  of  francs) 

■\ssETs  J^''\,  J^'-*,       '915        1916        1917        1918 

,-    ^    .           7  Dec.  31  Dec.  31  Dec.  31  Dec.  31  Feb.  28  Apr.  30 

Lash    in   vaults   and   in   the 

hanks 173  102         120          84           87          260 

Portfolio    890  277         263 

Items  for  c -llection   81  22           20 

I'ortfniio,  items  for  collec- 
tion and  national  defense 

.^'""'^    ■ ,■     -  406  435         793 

.Advances  on  collateral  and 

^'■'^'"^'•'*    448  .175         288        260        278         265 

Current  accounts  561  608         522         479         S07         557 

T^"'-^'  *"''*'-   2,612  1.822       1,675       1,676       1.759      2,336 

Liabilities 

Deposits  673  457         417        452         477         613 

Current  accounts  1,118  624         573         655         720       1137 

Acceptances    176  102           45           13           10         '25 


It  is  interesting  to  note  that  for  all  of  these  institutions  the 
ratio  of  cash  on  hand  and  in  the  hanks  to  credits  extended  or  to 
deposit  and  current  account  liabilities  has  risen  very  greatly.  It 
is  notable  that  all  of  them  have  changed  their  form  of  statements 
so  that  "  portfolio  "  is  comliined  with  "  natinnai  defense  bonds," 
making  comparison  with  the  prewar  period  imjiossible  as  to  the 
extent  of  their  commercial  advances,  even  assuming  that  "port- 
folio '■  has  in  the  past  represented  exclusivelv  commercial  credits. 


FRANCE  117 

Noteworthy  too  is  the  extreme  drop  in  acceptances.  It  is  very 
clear  that  no  one  of  these  institutions  is  performing  anything 
like  its  prewar  services  for  commerce.  A  similar  story  is  told 
for  most  of  the  smaller  institutions.  An  illustrative  case  would 
be  the  Banque  Frangaise  pour  le  Commerce  et  I'lndustrie,  estab- 
lished in  1901  with  a  capital  of  fiO.000,000  francs: 

Assets;                                                              July  31,  1913  July  31,  1917 

Cash  in  vaults  and  in  banks Fr.  32,000,000  Fr.  34,000,000 

Portfolio 105,000,000  40.000,000 

Reports  and  advances  on   securities.,.        83,000,000  27.000.000 

National   defense   Ixinds 73,000.000 

Current  accounts   » .         16,000,000  23,000,000 

Total   assets 327,000.000  250,000,000 

Liabilities : 

Current   accounts    191,000,000  158,000.000 

Acceptances  and  bills  payable 55,000,000  12,000,000 

A  notable  and  pleasing  exception  to  the  general  drift  of  the 
figures  of  the  French  private  banks  is  presented  by  the  Banque 
Nationale  de  Credit.  This  institution  was  established  in  1913, 
taking  over  the  Comptoir  d'Escompte  de  Mulhouse.  It  had  144 
branches  and  agencies  in  1916,  centering  in  Paris.  It  started 
out  as  a  commercial  bank.  It  did  not  issue  loans  before  the  war, 
though  it  has  since  aided  extensively  in  floating  the  war  loans. 
Of  the  banks  of  the  second  order  this  is  now  perhaps  the  first  in 
size.  Its  good  showing  is  probably  due  to  the  fact  that  it  had 
not  been  involved  in  the  disastrous  loan  flotations  of  the  prewar 
period.  It  has  done  much  better  than  the  great  credit  houses  in 
the  matter  of  providing  new  credits.  Its  balance  sheet  shows 
the  following  changes  during  the  war : 

Dec.  31, 1913  Dec.  31, 1915  Dec.  31, 1916Dec.  31,1917 

Assets ;                                          Francs  Francs  Francs  Francs 
Cash    on    hand    and    in 

Banque  de  France. ..     10,000.000  13,000,000  28,000,000  59.000,000 
Other  banks  and  bank- 
ers       24,000,000  28,000,000  31,000,000  38.000.000 

Portfolio   7.'? ,000.000  79.000.000  117.000,000  169.000  (XKl 

Current  accounts    40.000,000  S.S.OOO.OOO  61.000,000  78,000  000 

A<lvancfi  on  securities.     .'6,000,000  44,000,000  54,000.000  71,000.000 

National  defense  bonds  ,'^2.000.000  92.000.000  244  000000 

Total  assets   .W.000,000  386,000,000  502,000.000  827,000.000 

Liabilities  - 

Deposits     and     current 

accounts    142.000,000    214.000.000    322.000.000    581.000.000 

Acceptances    67,000,000      24,000,000      29,000.000     22,000,000 


ii 


J  IS     EFFKCTS  OF  THE  WAR   ON    MONEY,   CREDIT  AND  BANKING 

In  only  one  respect  do  tliese  lank  ii{;urcs  rcsenil)le  those  oi 
the  other  private  banks  considered  and  that  is  in  the  decline  of 
acceptances.  Uank  acceptances,  so  prominent  in  France  before 
the  \var,  have  evidently  become  a  matter  of  minor  importance. 

It  is  interesting  to  note  that  this  i)ank  has  kept  separate  in  the 
figures  its  |)ortfolio  and  the  national  defense  ijcmds  (as  is  the  case 
with  the  Ban(|ne  Frangaise  pour  le  Commerce  et  1"  Industrie,  the 
other  smaller  bank  whose  accounts  we  have  examined).  For  the 
Banque  Xationale  de  Credit,  the  national  defense  bonds  are  now 
the  most  important  asset  and  their  growth  has  been  enormous 
since  they  first  appeared  in  its  balance  sheet.  But  the  portfolio 
also  shows  a  great  increase.  It  is  probable  that  this  bank  has 
been  a  beneficiary  of  the  popular  distrust  of  the  great  credit 
houses. 

The  writer  finds  no  reason  to  sup])ose  that  the  major 
private  banks  in  l-'rance  are  in  danger  of  insolvency.  Their 
general  policy  before  the  war  of  selling  securities  to  the  people 
has  been  disastrous  for  France  and  the  depression  and  panic 
preceding  the  war  made  it  im])ossible  for  them  to  escape  sub- 
stantial losses  to  themselves  despite  their  efforts  "  to  stand  from 
under."  But  on  tlie  whole  they  have  probably  shifted  most  of 
the  bosses.  The  ])eople  rather  than  the  great  private  banks  have 
borne  the  main  burden  of  the  ai)palling  decline  in  the  second 
rate  and  third  rate  foreign  securities  purchased  through  these 
banks.  How  great  these  losses  have  been  we  will  consider  in  our 
chapter  oi^  the  Frencii  bourse.  .At  the  jjresent  time  it  seems  prob- 
able that  all  the  '^'-ivate  lianks  in  F'rance  arc  in  a  very  .sound 
position  and  the  mam  criticism  which  we  shall  pass  upon  their 
war  time  i»olicy  relates  not  to  its  safety  l)ut  to  its  selfishness. 
They  have  not  done  tlieir  duty.  l)y  and  large,  to  the  commerce 
and  industry  of  France.  I'.ut  this  we  have  seen  in  rui  earlier 
chai)ter. 

The  I'rench  savings  !)anks  presented  an  alarming  problem  at 
the  outbreak  of  the  war — a^  indeed,  in  le.-s  degree,  has  been  true 
of  savings  banks  in  bjigland  and  the  L'nited  .States.  The  great 
difficulty  grew  out  of  the  tendency  of  depositors  to  withdraw 
their  deposits  to  meet  the  war  emergencies  and  rising  commodity 


FRANCE 


119 


prices  at  the  same  time  that  the  securities  held  by  these  institu- 
tions were  declining  heavily  in  price  on  the  bourse.  Whatever 
the  causes  involved,  the  clear  tendency  in  France,  the  United 
States  and  Great  Britain  has  been  for  commodity  prices  to  rise 
and  for  securities  of  a  fixed  yield  to  decline.  The  figures  for 
deposits  and  withdrawals  of  the  French  savings  banks  are  sub- 
stantially represented  in  the  figures  of  the  operations  of  the 
Caisse  des  Depots  et  Consignations  with  the  caisscs  d'cpargnc 
ordinaircs.  The  former  is  a  great  state  institution  which  re- 
ceives trust  funds  from  the  courts,  the  deposits  of  the  frientlly 
societies  and  the  deposits  of  the  ordinary  savings  banks,  with 
some  other  minor  items.  The  latter,  the  ordinary  savings  banks, 
are  institutions  scattered  all  over  the  country  which  r:^ceive  sav- 
ings deposits  from  individuals  and  turn  them  over  to  the  great 
central  institution  for  investment.  They  are  legally  bound  to  do 
this.  When  their  depositors  call  on  them  for  funds  they  call  on 
the  central  institutions.  The  total  liabilities  of  the  Caisse  des 
Depots  et  Consignations  on  December  ;31.  1!)13,  were  5,020,000,- 
C^O  francs,  of  which  over  four  billions  were  due  to  the  savings 
banks.'  These  funds  before  the  war  had  Ijeen  chiefly  investerl  in 
the  ;5  per  cent  rente,  at  an  average  price  above  s.5.  During  the 
war  the  price  of  the  3  per  cent  rente  has  declined  from  84  or 
8o  to  about  fiO,  which,  with  the  decline  of  other  investments,  no 
doubt  has  left  the  Caisse  des  Depots  et  Consignations  technically 
insolvent.  However,  technical  insolvency  is  not  a  serious  maUer 
for  this  institution,  a.ssuming  that  the  state  itself  remains  solvent, 
since  there  is  a  tacit  understanding  that  the  state  will  protect  the 
institution.  In  the  great  loan  of  101,">,  for  example,  the  state 
took  indirect  steps  to  protect  savings  deposits  by  accepting  them 
for  subscriptions  to  the  loan.  At  the  outbreak  of  the  war  excess 
of  withdrawals  over  deposits  was  large.  Thus  for  the  period 
January  1  to  July  20,  1014,  deposits  exceeded  withdrawals  by 
about  21,000,000  francs.  For  the  period  July  20  to  December 
20,  1014,  withdrawals  exceeded  deposits  by  KU .000.000  francs 
despite  heavy  restrictions  under  the  moratorium  on  withdrawals. - 

'  Sec  balance  sheet  in  Quarterly  Journal  of  Economics,  Xovembcr,  1915, 
pape  75 . 

'  Sec  weekly  figures  in  Economisle  Francois. 


a. 


i  . 


ill 


120      KIFIXTS  OF  THE  \V  \R  ON    MONEY.   CREDIT   AND  BANKING 

In  June,  r.U:.,  it  was  still  necessary  to  limit  witlulrawals  to 
fifty  francs  per  l)ook  per  fortnight,  and  witlulrawals  still  sub- 
stantially exceeded  de])osits.  In  May,  11»17,  deposits  and  with- 
drawals were  sul;stantially  e(|nal,  deposits  being  lt;,.">t!;J,()(>0 
francs  and  witlulrawals,  lt!,(;!iT,(M)()  francs.  The  week  of 
Octolier  11  to  October  :,'(».  I'.UT,  showed  dejjosits  of  7.2ir.,000 
francs  and  withdrawals  of  only  1,7".M1,(K»0  francs.  The  excess 
of  deposits  over  >\'ithdrawais  from  January  1  to  October  10, 
!!•  1 7,  was  1  .">(), Ii'l'.ooo,  showing  that  the  tide  had  turned  definitely 
and  thai  the  savings  banks  were  safe.  It  is  not  necessary  that 
these  institutions  should  be  able  to  liquidate  their  assets  in  order 
to  remain  in  a  souiul  position.  The  emergency  past,  the  most 
sigm'ticant  part  of  their  operatic  -;  li^'s  in  the  field  of  income 
accounts  rather  than  of  capital  arcounts.  With  the  state  behind 
them  they  are  safe. 

Criticism  of  their  jjolicy  of  investing  chiefly  in  the  rente  may 
be  made.'  Lysis  say>  that  the  savings  banks  have  been  used  by 
the  state  to  ])rolect  the  rcitli  against  attacks  on  the  part  of  the 
great  banks.  This  may  be  true.  It  is  probably  true  in  any  case 
that  the  extensive  purchases  of  the  rente  by  the  Caisse  des  Depots 
et  Consignations  has  given  the  rente  an  artificial  price  in  the 
prewar  ])eriod  and  has  made  the  earnings  of  the  savings  ileposits 
con.se(|uently  less  than  they  would  have  l)een.  The  state  is  thus 
inuler  great  im  ral  obligations  to  this  institution. 

In  ItiH'i  a  new  '.  <\\  raised  the  ma.xinuim  deposits  at  the  savings 
liaiiks  from  1, ">(»()  t  >  .".ouo  francs  and  the  ma' .imuni  deposits 
in  friendly  societies  from  l.'">,0(l(l  to  l'.'>,(MM»  francs.^' 

The  |)osition  of  the  Credit  I'oncier  would  in  many  respects 
be  like  the  |)o^ition  of  the  savings  banks  since  its  main  assets 
are  mortgages  on  real  estate — fi.xed  iiueslmeiits  which  tetul  to 
de|)reiiate  a>  iiUerest  rales  rise.  The  position  would  tend  to  be 
stronger  to  the  extent  thai  it  had  a  large  margin  ii\  the  value 
of  the  real  e.late.  ( )n  the  other  hand,  its  position  would  teiui 
to  he  weaker  in  ih.ii  a  large  aiiuiunt  of  its  loans  were  made  in  the 
territory  occupied  by  tlu'  (lermans.     .\  large  anumnt  of  its  in- 


'  (>/.   .//.pant-  i"«. 

'  Ixiiiildn  /;i(iiiii»nj/.  .\ugii>t  IJ,  1911),  page  287. 


■J  ■■    F?S 


FRANCE 


121 


come  from  the  mortgages  in  occupied  territory  has  heen  of  course 
shut  off.'  On  the  whole,  however,  the  Credit  Foncie.  .las  seemed 
to  weather  the  storm,  its  profits  in  litlO  wrc  12,594,00(1  francs 
and  its  dividend  25  francs.  In  1!H7  its  profits  were  1."), 80.5,000 
francs  and  its  dividend  ;J0  francs.^  F.arly  in  11>17  the  Credit 
P'oncier  is.sued  a  new  block  of  securities  nominally  amounting  to 
tJOO.oon.ooo  francs;  actually  is.sued  at  2S5  per  ;5()0  franc  bond. 
The  interest  was  :>%  per  cent  and  the  term  seventy  years.  The 
issue  was  made  more  attractive  by  the  prospect  of  valuable 
prizes:  six  in  number,  one  of  500,000  francs  and  five  of  250,000 
francs,  to  be  awarded  one  at  a  time  at  six  periodical  drawings. 
There  was  great  jxipular  interest  in  this  issue.-' 

Early  in  lit  IT  some  new  credit  institutions  for  small  traders 
and  manuf.ncturers  were  estal)lishe(i,  mutual  guarantee  societies 
similar  to  the  agricultural  syndicates  in  certain  respects.*  There 
has  been  increasing  recognition  in  I'rance  during  the  war  of  the 
need  for  credit  for  manufacturers  and  agriculturists,  and  we 
have  already  seen  that  the  state  itself  has  made  extensive  ad- 
vances to  various  necessary  enterj)rises.'' 

'  l.oiuloM   limnomisl.  January  J,  1915,  page   1". 

'Journal  dis  Ecoitninislr^.  NI.i\   15.  191.S,  paKcs  22i-224. 

'  Lotuloii  lioiKiiiiist.  March  Kl,  1917,  p.i^f  A72. 

;  Ibid.,  .\larcli  24.  l'»17,  i^Kr  554. 

"Ill  ciintuitii'ii  uilli  llic  t^nat  loan  nf  1916,  .Mbirl  Thomas  Mated  tliat 
part  iif  the  li.iii  uas  «. ii"K  m\n  real  rapit:il,  plants  which  would  be  useful 
after  the  war.    Ibid..  October  28,  1910,  page  822. 


i:    i. 
1 .,  f 


! 


CHAPTER  X 
The  Moratorium  in  France 

In  an  earlier  clia])ter  dealing  with  tlie  ontbieak  of  the  war  we 
have  seen  liow  rij^nrous  a  moratorium  was  estal)hslie(l  in  France 
and  liave  seen  somethini;  of  the  (Hfticulties  occa>ionecl  thereby. 
A  (Hstinj^uished  Frencli  financial  authority  expresses  the  opinion 
tliat  in  the  absence  of  a  moratorium  on  the  bourse  the  general 
moratorium  would  have  been  unnecessary.  Tying  up  the  bourse 
made  the  position  of  the-  l)anks  very  difficult  in  view  of  the  large 
amount  of  loans  tliey  had  on  stock  exchange  securities.  This 
coni])elled  the  banks  in  liis  opinion  to  have  recourse  to  a  mora- 
torium on  deposits  and  thus  made  it  necessary  for  the  general 
public  to  have  a  relief  from  the  i)ressure  of  creditors.  The 
weakness  of  the  l)ourse  was  thus  the  cru.\  of  the  whole  matter. 

The  magnitude  of  the  loans  involved  in  the  Inuirse  settlement 
immediately  preceding  the  outbreak  of  the  war  was  alx)ut  as 
follows : 


(In  till'   Paninct Kr.  WIO.000,000 

On   the   ^.oull^-^■    unrhi    l.=;o,()0().()0(l  to  iOO.OOO.OOO 

with  an  additional  >»0(I.<m)o,()(M)  francs  on  extra-bourse  collateral 
loans  conhned  to  the  banks  and  credit  houses,  presumably  also 
"  rrf'itrts  "  or  "  coiitaiu/ih's  "  su])posed  to  be  liouidated  at  the 
sa,.ie  time  that  the  bourse  settlement  was  made.  The  l'ar(|uet 
was  in  even  worse  p<isitinn  than  the  Coulisse,  since  many  of  the 
C  "itli^se  securities  were  still  negotiable  at  London  and  Petro- 
grad.' 

It  is  interesting  to  contrast  the  position  of  I'aris  and  London, 
where  the  fnrtnightly  stock  exchange  settlement  prevails,  with 
that  I  if  Xcw  ^■(lrk.  where  daily  settlements  are  made.  The  daily 
>ettlement  in  .\'ew  YdtU  gives  rise  to  a  much  greater  volume  of 

'London   Lconomist,  November   14,   1914,  page  88J .    .November  21.   1914, 
pngc  ').M  .   I..iUKlilin.    ./•    cir  ,  |i:iKis   1.^7-158. 

128 


FRANCE 


123 


bank  clearings,  of  shifting  of  loans  and  of  checks  between 
brokers  and  brokers  or  between  bankers  and  brokers.  There  are 
times  when  it  may  be  characterized  almost  as  a  nuisance  in  the 
sheer  physical  magnitude  of  the  mechanical  operations  which 
bank  clerks,  stock  exchange  clearing  house  clerks,  and  brokers 
have  to  go  through  with,  but  it  has  the  supreme  merit  of  giving 
a  clean  slate  at  the  end  of  each  day.  The  problems  in  Xew  York 
following  the  closing  of  the  stock  exchange  at  the  outbreak  of 
the  war  were  much  simpler  as  a  result  of  the  daily  settlement  than 
were  the  problems  of  Paris  anil  London,  where  the  fortnightly 
accumulation  of  operations  hung  over.  It  is  of  course  not  true 
that  the  advantage  in  favor  of  the  New  York  method  is  14  to  1. 
The  actual  magnitude  o.'  loans  on  the  Paris  bourse  would  in  any 
case  have  been  great,  but  daily  settlements  would  have  had  the 
advantage  in  the  first  place  of  discovering  the  weak  points  earlier 
and  would  moreover  have  substantially  reduced  the  magnitude  of 
the  loans  hanging  over. 

Early  in  November,  lit  14,  cautious  plans  were  made  and 
agreed  to  by  the  Uanque  de  France  for  the  relief  of  the  Parquet, 
the  official  bourse.  The  plan  involved  an  advance  i<y  the  Banque 
of  40  per  ct.it  of  the  -irts  or  loans  on  securities  for  the  fort- 
nightly settlement,  to  i  nade  on  deposit  of  the  securities  with 
the  Banque,  at  5  per  cent.  The  Banque  requires  three  names  on 
all  loans  made  by  it  and  these  loans  had  only  two  names,  that 
of  the  lender  and  that  of  die  borrower.  To  give  the  third  name 
required,  it  was  arrange.'  that  the  Parquet  itself,  the  Syndicat 
des  Agents  de  Change,  should  guarantee  these  loans  made  by 
the  Banque.  Forty  per  cent  of  the  interest  should  go  to  the 
Banque  and  HO  per  cent  to  the  origuial  lendtrs.'  Comparatively 
little  use  seems  to  have  l)een  made  of  this  arrangement  owing  to 
dirticultie-^  made  by  the  Syndicat  itself,  and  Kibot  resisted  pres- 
sure to  have  the  Bancpie  de  France  liquidate  the  liourse  on  oflur 
terms."  The  Coulisse  later  in  Xovember  tried  to  get  relief  from 
the  Ban(|ue  by  a  similar  plan,  proposing  to  organize  a  limited 
liability   c  mipany   with   a   capital   of   4I,(H>0,000    francs    (one- 

'  l.oiuloii   licotiomist.   NnvctnlKT   14,   lOU,   pact'  8S.? :    Novt'tnlier   21,    I014, 
pagi'  "'21 
^thid..  necemhcr  1Q,  1914,  page  1069;  July  24.  1915.  paRt  111 


w 

11 


III 


1-2i     KIKLCTS   OK    Tin;    war   on    MONF.Y,    CRKDIT    A.\I>    i WKIN'G 

<HKirter  paid  in),  whicli  slunild  sujiply  tlic  third  sij^nature  for 
rc'ixirts.    Xotliinj:;  seems  to  have  come  of  this. 

liy  July.  11' ir.,  the  ditticultie>  had  ln'come  ^  "ater  through  the 
decline  of  the  rrntr  which  had  dropped  to  »>!».;».">,  and  of  the 
i\u>sian  .">'s  of  !'•'  \hich  were  down  to  s<>.T.">.  Interest  of 
course  c<intinued  :  accmnnlale.  Ikit  there  had  heen  a  great 
deal  of  private  ami  \i limitary  liiiuidation  on  the  bourse.  Of  the 
(ioo.oOM.OOO  fraiic>  mi  tlie  Parquet,  all  hut  iso.ooo.ooo  had  been 
settled,  liy  August  "uly  i'."*  per  cent  of  the  Coulisse  reports 
remained  unsettled.  In  .August  a  plan  was  arranged  by  the  Par- 
i|uet  tor  tlie  issue  of  7.">,<MM>,00(>  francs  of  l*0-.">0  year  points  at 
tl  per  cent  to  be  i>sued  at  '.•>0  francs  per  thousand,  to  be  tax 
eNettipt.  guar.inteed  by  the  members  of  the  bourse  as  a  whole, 
with  the  interest  secured  by  a  levy  on  their  commissions,'  to  pro- 
vide funds  for  the  >ettlemeut.  This  high  rate  of  interest  on  a 
loan  of  such  length  is  striking  evidence  of  the  weakened  credit 
of  the  bourse. 

Ill  Octnber,  lit  I.".,-  the  Ixmrse  settlement,  which  had  hung  over 
from  the  outbreak  of  tiie  war,  tinally  went  tiirough  with  very 
little  trouble  and  the  bourse  moratorium  lapsed. 

The  general  moratorium  lasted  much  longer.  On  October 
2~,  \'M\.  Ril)ot  aniKiunced  ;i  moditication  '  in  the  moratorium. 
l-"or  the  general  moratorium,  a  distinction  was  made  between 
those  called  to  tiie  colors  and  tiiose  remaining  at  home.  I"or 
the  first  class  the  moratorium  continued  absolute;  for  the  second 
class  a  modified  regime  was  set  up  to  l>eceml)er  •]!.  During 
November  they  could  not  he  pressed  by  kyal  process,  but  after 
December  1  the  ([uestion  of  whether  the  debtor  was  maliciously 
taking  advantage  of  the  moratorium  could  be  raised  by  the  civil 
tribunals.  The  decree  also  made  a  modification  in  the  bank  mora- 
torium. The  decree  of  .August  it  had  limited  sums  withdrawn 
by  de|)i)sito.'-s  to  :.'.".ti  francs  i)lus  .'>  per  cent  of  the  surplus;  on 

'  lh„l..  July  3,  1915,  pafte  16;  July  24,  1915,  page  133;  August  iH,  1915, 
patje  i27. 

r.nlc-.Mir  l.iuuhlm,  ii/>.  lit  ,  piige  169,  (l.ift"i  thii  apparently  as  October, 
1'114,  whicli  woul'l  sri'tn  to  hv  an  error,  Cf.  London  '■cniinmist.  Ortohcr  9, 
l'»15,  paRi-  541 

'  r.i-itiu'iiiiste  I'ramais,  Ortobir  31,  1914;  l^ndon  liidniimisi,  November  7, 
1914.  page  842. 


FRANCE 


12.': 


August  21).  this  was  raised  to  2.".0  francs  plus  20  per  cent  of  the 
surpkis;  on  September  27,  to  2.'')0  francs  plus  2.'')  per  cent  of 
the  surplus.  By  Kibot's  new  statement,  it  was  raised  to  1,000 
francs  plus  40  per  cent  for  November,  and  1,00(»  francs  plus  50 
per  cent  for  December. 

This  decree  represented,  of  course,  a  very  considerable  though 
cautious  modification  of  the  moratorium,  but  it  led  to  a  fright- 
ened reaction.  A  new  decree  issued  November  24  continued  the 
moratorium  in  full  rigor  to  the  end  of  December,  suspending  the 
previous  modification  relating  to  nonmobilized  debtors.'  One 
difficulty  arose  from  the  fact  that  the  distinction  between  those 
mobilized  and  those  not  with  the  colors  was  hard  to  draw,  since 
a  man  might  himself  be  with  the  army  while  his  firm  continued 
in  business. 

Certain  of  the  great  banks,  however,  ceased  to  take  advan- 
tage of  the  moratorium  on  deposits  on  the  first  of  January,  11)15, 
as  we  have  seen  in  uur  chapter  on  the  private  l)anks.  But  the 
general  moratorium  continued  with  many  renewals  and  partial 
modifications  for  a  long,  long  time.  In  the  last  statement  of 
the  Banqu?  de  France  of  August,  litis,  there  still  appear  over 
a  billion  francs  of  the  premoratorium  bills,  a  sul)stantial  reduc- 
tion from  the  nearly  four  billion  francs  of  the  fall  of  I'JU,  to 
be  sure,  but  still  a  large  holdover. 

The  moratorium  on  rents  has  remained  a  vexed  question  into 
1S»18.  A  measure  was  passed  by  the  Chamber  of  Deputies  in 
June,  HUT,  dealing  with  the  tnatter,  but  the  Senate  refused  to 
C(jncur,  and  in  March,  r.)ls.  the  Chamber  was  still  debating  the 
(juestion.-  The  exact  status  of  the  moratorium  at  the  present 
time  is  not  clear.  .\  very  large  body  of  prewar  debts  have  Ix'en 
voluntarily  liqui«lated.  Modifications  of  the  moratorium  which 
have  put  much  <liscretion  in  the  hands  of  the  civil  tribunals  have 
led  to  further  liquidations.  No  doubt  many  premoratorium  debts 
can  never  be  paid  as  the  debtors  are  dead  or  ruined.  Tliere  will 
probably  remain,  however,  at  the  end  of  the  war  a  substanti'l 
number  of  unpaid  debts  whidi  will  then  he  litiuidated. 

'  London  Ici'oouiisl.  niccintur  5.  l'>14,  paur  •'''7. 

'  !hid..  Jiiiii  JS,  1<)17,  piiK't  119;  M.trcli  2.  1918,  page  J87. 


-if 

!      * 

If 

Ml 


i; 
if. 


126     EFFECTS  OF  THE   WAR  ON    MONEY,   CREDIT   AND  BANKING 

In  our  section  dealing  with  the  outbreak  of  the  war,  the 
opinion  was  expressed  tliat  at  every  stage  the  moratorium  legis- 
lation went  too  far,  that,  even  granting  the  necessity  of  extraor- 
dinary remedies,  no  such  rigid  restrictions  were  called  for.  Cer- 
tain it  is  that  the  moratorium  hung  as  a  millstone  about  the  neck 
of  France,  hampering  her  recovery  for  a  long  time.  The  one 
doubt  that  must  be  expressed  as  to  the  validity  of  this  verdict 
hinges  on  the  weakness  of  the  private  banks;  had  they  been 
strong  enough  and  courageous  enough  they  could  have  .nade 
such  rigorous  measures  unnecessary.  With  their  ability  to  redis- 
count on  the  Banque  de  France  and  to  receive  from  the  Banque 
its  notes  circulating  under  the  cuurs  force,  it  is  not  easy  to 
see  why  tin  y  could  not  have  expanded  their  credits  to  any  neces- 
sary extent  to  enable  solvent  debtt^rs  to  meet  their  obligations. 
But  with  the  weak,  selfish  and  timid  course  which  the  great 
private  banks  took,  it  may  be  that  a  moratorium  was  unavoid- 
able. It  is  not  to  be  forgotten  in  contrasting  France  with  Great 
Britain  and  the  United  States  in  this  matter,  that  virtually  the 
whole  man  power  of  France  was  suddenly  mobilized,  that  her 
whole  industry  and  commerce  were  thrown  violendy  out  of  gear 
by  the  necessities  of  the  case,  that  her  richest  provinces  were 
seized  and  that  her  capital  city  itself  was  in  imminent  danger. 


CHAPTER  XI 


The  French  Bourse  during  the  War 


n^l 


In  our  chapter  on  "France  at  the  outbreak  of  the  war," 
attention  was  centered  on  the  bourse.  The  list  of  securities  dealt 
in  there  had  been  weakened  by  prewar  speculation  and  depres- 
sion. We  have  seen  how  largely  they  consisted  of  second  rate 
issues  of  foreign  governments.  Russians,  Bulgarians,  Brazilians, 
Argentine  securities.  Mexican  securities  and  the  like.  When  to 
this  weakness  was  added  the  frightened  selling  on  the  bourses  of 
Vienna,  Berlin  and  other  centers,  followed  by  the  wild  panic 
when  war  was  clearly  in  sight,  it  is  not  surprising  that  the  whole 
fabric  collapsed.  We  saw  something  of  the  extent  of  the  decline 
of  representative  securities  and  the  extent  of  the  recovery  by 
December  7,  1014,  when  the  bourse  was  reopened  for  cash 
trading  only.  A  preceding  chapter  has  given  an  account  of  the 
bourse  moratorium  and  of  the  lapsing  of  that  moratorium  in 
October,  1915. 

The  main  story  of  the  bourse  in  the  four  years  following  the 
outbreak  of  the  war  is  best  told  in  the  accompanying  charts. 
Attention  may  be  called  to  the  divergence  between  the  prices  of 
shares  of  the  Banque  de  France  ami  of  the  other  French  banks. 
The  five  banks  treated  in  the  curve  for  the  other  French  banks 
are: 

Banque  de  Paris  et  dcs  Pays-Bas 

Comptoir  (t'E'.compte 
Credit  Foncier 
Credit  Industrie!   (liberee) 
Credit  Lyonnais 

There  has  been  a  steady  rise  in  the  shares  of  the  Banque  de 
France  from  the  last  quarter  of  lOlT)  and  a  decided  decline  in 
the  shares  of  the  other  banks.    The  reasons  for  this  have  been 
fully  st.ited  in  our  previous  discussions  of  these  institutions. 
The  two  railway  shares  chosen  are  the  Midi  and  the  Lyons, 

187 


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1.1. 


12S      KFKKCTS   l)F 


THE    WAR   OS    MONEY.    CREDIT    AND   BANKING 


3UVHS  tJ3d  SONVaj 


FRANCE 


129 


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I'M      KllECTS   OF   THE    WAK   0.\    MONEY,    CREDIT   AND   BANKING 

neither  f  which  lias  l)een  seriously  affected  directly  by  the 
German  invasion.  On  the  whole,  the  rails  show  less  decline  than 
the  private  banks. 

Kio  Tinto,  a  famous  Spanish  copper,  dealt  in  on  the  London 
e.xdiaiii^e  as  well  as  on  the  Paris  bourse,  is  fairly  representative 
of  securities  favorably  affected,  so  far  as  earnings  are  concerned, 
by  the  war.  Its  moderate  rise  is  significant  of  the  general  ten- 
dency of  all  securities  to  yield  n  higher  return  for  given  prices. 

The  two  curves  which  are  significant  of  the  greatest  losses  to 
T'rench  investors  are  the  ."i  per  cent  rente,  which  has  declined 
from   n4  to  about  <:o,  though  holding   fairly  steady  since  the 
beginning  of  lOltl.  and  the  Russian  .-i's  of  190(t,  which  have 
declined  from  over  10(t  to  a  low  of  4f.,  with  a  recent  limited 
upturn.     The  decline  in  the  price  of  the  rente  represents  pri- 
marily not  loss  of  confidence  in  the  French  Government,  but 
scarcity  of  capital  and  a  general   rise  in  interest  rates.     The 
declme  in  the  Russian  security,  however,  is  chiefly  due,  as  our 
curve  shows,  to  the  collapse  of  Russia  in  l!tl7  and  1!>1S.     Many 
other   i-tussian   securities  would  show  a  much  heavier  decline. 
Iiarticularly  Russian  industrials,  rails  and  banks.     It  is  interest- 
ing to  note  that  just  prior  to  the  Russian  revolution,  Russian 
securities  were  very  strong.     There  had  been  an  industrial  re- 
vival in  Russia  and  there  was  much  confidence  in  France  in  the 
Russian  situation.'     \or  did  the  revoluti  n  itself  immediately 
lead  to  depression  in  the  ])rice  of  Russian  securities.     The  Rus- 
sian revolution  was  exceedingly  popular  in  France.     Riliot,  suc- 
ceeding Hriand  as  Premier  in  March,  1!»17,  spoke  very  encourag- 
ingly of  the  Russian  situation.'    The  general  course  of  Russians 
belli   fairly  well   for  s.nue  weeks,  but  by   N'ovember,  1!»17,  the 
collapse  was  pretty  complete.     The  ruble  was  worth  only   7.5 
centimes  (about  1.".  cents)  against  a  mint  par  of  over  M)  cents, 
and  Russian  securities  genendly  were  sliot  to  pieces.     By  Jan- 
uary,   I'.tl"^,   it   was  clear  that  disaster  threatened  many' small 
investors  in  Russian   fluids  and  steps  were  being  taken  bv  the 
I->eiic!i  and  I'.ritish  Governments  to  protect  them.     Vidal.  a  well 

'  I.oikIi'II  l-ciiii'imist,  .March   17,  1917,  page  512. 
'■Ibid..  Marcli  H,  I'>|7,  page  586. 


FRANCE 


131 


known  authority  on  French  securities,  gave  out  a  reassuring 
statement  on  tlie  inability  of  a  great  state  to  remain  bankrupt. 
Lloyd  George  made  tlie  British  Government  responsible  for  the 
Russian  Treasury  bonds  and  commercial  bills  discounted  under 
the  commercial  treaty  of  ll)l.->  between  the  Bank  of  England  and 
the  Finance  Ministry  of  Russia.'     There  was  still  a  belief  that 
the  Bolsheviki  would  Ije  unable  to  carry  out  their  plans,  however. 
Edmond  Thery,  well  known  as  a  w   iter  of  French  finance,  gave 
out  a  statement  in  January,  1018,  with  reference  to  the  Russian 
situation,  which  tended  somewhat  to  restore  confidence.   His  fig- 
ures served  to  show  that  the  railway  revenues  in  Russia,  amount- 
ing to  ;{21  million  rubles,  constituted  80  per  cent  of  the  interest 
on  the  Russian  state  debt  by  the  close  of  1912.    He  thought  that 
not  over  12.()()0.()00,0()()  francs  of  Russian  securities  of  all  kinds 
were  held  in  France  at  the  outbreak  of  the  war,  though  other 
estimates'  have  run  as  high  as  :iO,()00,000,000.     Alx)ut  three- 
fourths  of  this  12,000,000,000  had  been  used,  he  said,  in  pur- 
chasing existing  railways,  in  creating  new  lines,  in  developing 
industry  and  agriculture  and  in  consolidating  old  loans.     From 
1902  to  1912  there  had  been  rapid  economic  developments  in 
Russia,  shown  by  the  following  percentage  increases  for  various 
commodities :  ^ 

uru    .  ^"  ^^'^K  Per  cent 

Wneat    30     Iron  and  steel 100 

Barley    63     Imports    95 

Oats    21      Exports    .';;.'     75 

Potatoes    32     Ordinary   budget   receipts 40 

Coal    77     Railway  receipts  ! 80 

The  I'>ench  Government  has  not  assumed  full  responsibility 
for  the  Russian  securities,  but  it  has  paid  the  coupons,  "  transi- 
toircmcnt  ct  prorisoircmcnt,"  *  recognizing  specially  its  respon- 
sibility for  loans  floated  since  the  outbreak  of  the  war  and  recog- 
nizing that  a  great  deal  of  the  French  capital  invested  in  Russia 
was  invested  by  patriots  who  foresaw  the  war  and  felt  that  they 
were  strengthening  an  ally  who  would  protect  France  against  the 
enemy.     Most  of  the  bonds  are  in  the  hands  of  comparatively 

'Ibid.,  January  26,  1918,  pai;e  118 

'  Ibid..  Mav  2.  1918,  pape  915. 

'  Ihid,  IVl)niary  2.  1918.  page  1.'59. 

'  Journal  dcs  J-coiiomistes,  .May  IS,  1918.  page  280. 


-1 


III 


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4  ' 


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132     KFIECTS  OK  THE  WAR  ON    MONEY,   CREDIT   AND  BANKING 

poor  people.  The  Russian  loan  of  January,  l!tl4.  had  been 
expressly  sanctioned  by  the  Finance  Ministry  on  the  ground  that 
it  was  to  he  usetl  for  strategic  railways.  The  total  burden  of 
interest  on  Russian  securities  would  be  about  a  billion  francs  a 
year,  not  easy  for  the  French  state  to  I^ear.'  In  connection  with 
the  new  l->ench  war  loan  of  October,  lit  IS,  provision  is  made 
for  the  acceptance  of  Russian  coupi)ns  up  to  ")()  per  cent  of  a 
subscription.- 

Our  curves  do  not  show  the  course  of  French  war  stocks 
because  of  the  dititiculty  in  getting  (piotations.  There  have  been 
war  I)ooins  in  munition  shares,  among  them  Hotchkiss  and 
Creusot.  There  have  lieen  vigorous  booms  in  oil  stocks,  coppers, 
chemicals,  rubbers  and  other  securities. 

An  e.xamination  of  the  curves  for  I'rench  securities  from  11)17 
on  will  show  coni[)aratively  slight  inthicnce  of  the  entrance  of 
America  into  the  war.  The  main  immediate  effect  of  .American 
entrance  into  the  war  was  an  improvement  in  French  exchange 
on  foreign  countries,  particularly  the  United  States,  Great 
Britain  and  Switzerland.  On  the  whole,  the  bourse  has  not 
been  violently  affected  by  political  events  since  the  reopening 
after  the  first  outbreak  of  the  war.  There  was  heavy  pressure 
on  bad  Italian  and  Russian  news  in  the  fall  of  liUt.  The  pro- 
longed battle  of  X'erdun,  however,  in  the  summer  of  11H(J  left 
the  bourse  strong  at  the  end  of  one  hundred  days.  To  a  very 
considerable  extent,  the  French  bourse  has  been  under  control 
and  violent  breaks  have  been  averted. 


'  I-ondoii  I'conoiitist.  May  2.  1918,  ;ia^c  915. 
'  Xeui  i'ork  Times,  September  19,  1918. 


:Si: 


CHAPTER  XII 


Hi 


French  Foreign  Trade  and  Foreign  Exchange 

In  a  large  way  we  have  already  outlined  '  the  course  of  the 
foreign  trade  relations  of  I-Vance  during  the  war.  From  the 
beginning  of  the  war,  France  has  bought  increasingly  from  for- 
eign countries  more  than  she  has  exported,  and  there  has  Ijeen  a 
continuous  piling  up  of  an  adverse  balance  of  trade.  F'.ven  be- 
fore the  war.  the  physical  balance  of  trade  was  "adverse"  to 
France,  but  this,  as  we  have  seen,  was  merely  symptomatic  of 
her  creditor  position.  A  rich  country  with  large  foreign  invest- 
ments can  afford  to  import  more  than  she  exports,  just  as  an 
individual  capitalist  can  afiford  to  consume  more  than  he  produces 
by  his  current  labor. 

In  the  first  six  months  of  the  war.  France  was  a  creditor  to 
all  countries  and  a  debtor  to  none.  In  the  early  two  or  three 
months  of  the  war.  checks  on  New  York  and  on  London  were  at 
a  heavy  discount  in  the  French  markets,  owing  to  the  interrup- 
tion of  the  shipments  of  gold  and  the  inability  of  American  and 
English  banks  to  meet  their  obligations  easily  in  Paris.  But 
during  these  six  months  France  began  to  buy  largely  abroad 
and  at  the  end  of  the  six  months  she  had  become  debtor  on 
current  items,  .so  that  the  foreign  exchange  rates  all  turned 
against  her  with  the  exception  of  those  on  Italy  and  Russia. 
The  climax  on  sterling  and  dollars  was  reached  on  April  i:j. 
1010,  when  a  check  on  London  was  worth  2>^.0.'}  francs  per 
pound  (as  again.st  a  mint  par  of  2.^). 22)  and  dollar  exchange 
(cable)  was  worth  fi.OT  francs  per  dollar  Cas  against  a  mint  par 
of  "..IS).  This  represented  a  discount  of  over  12  per  cent  on 
the  franc  in  terms  of  American  dollars. 

*  Chapter  on  "  Depression  and  '  Refrisr  dcs  Affaires' " 

i:t3 


5'  i 


H 


II 


i  I 


Hi: 


134      KFKECTS   OK  THE   WAR  ON    MON'EV.    CREDIT   AND  BANKING 

On  April  14,  l!)l<i,  there  was  an  agreement  made  between  the 
Frencli  and  Mnglish  Governments  dealing  with  foreign  exchange. 
The  BaiKjuc  dc  I'lance  tlimugh  tlie  Treasury  was  enabled  to  take 
control  of  the  situation  and  it  steadily  im])roved.  The  chief 
factors  have  been  large  credits  in  Great  Britain,  the  export  of 
gold  by  the  Banque  de  France  to  the  Bank  of  England,  the  pledge 
of  neutral  securities  as  a  basis  for  loans,  growing  confidence  in 
Allied  victories  and  large  loan  tlotations  in  America,  and  finally 
after  t!ic  entrance  of  the  United  States  into  the  war,  direct  loans 
by  the  American  Government  to  the  French  Government.  The 
following  table  '  of  exchange  rates  in  Paris  on  various  points  for 
three  dates  in  ItUC  will  l)e  of  interest: 

Rate,  Jan.  1          Highest  Rate               Rate,  Sept.  30 

Date  Rate 

I.i.ndon   27.80  Apr.   13  28.93  27.84 

Hollaiul    2.59  Jan.    11  2.66'.,                 2..W 

Italv     89  May    2  .95                       .90'/j 

.\ew   ^ork   5.86  .Apr.  13  6.07                     5.84'/^ 

Russia   1.74  Sept.    1  1.97',-i                1.87 

Sweden   1.63  Mayll  1.85' i                  1.66 

Switzerland l.lli^  April  1.17                     1.10 

An  exact  summing  up  of  the  ('obits  and  credits  in  France's 
balance  of  international  indebtedness  is  not  possible  on  the  basis 
of  data  accessible  to  the  present  writer,  but  certain  significant 
figures  can  be  given  which  will  outline  the  main  elements  in  the 
picture.  The  adverse  trade  balance,  large  in  r.tl.'>,  became  very 
great  indeed  in  T.Mti.  The  first  eleven  months  of  1!)1(;  show  an 
adverse  trade  balance  of  12,!»42,O0O,00(»  francs  when  allowance  is 
made  for  rising  prices.  The  official  figures  as  commonly  given 
out  have  been  based  ..n  the  prices  of  l!t14,  with,  after  the  first 
year  of  the  war,  a  correction  for  price  changes.-'  The  fir>>t  eleven 
months,  therefore,  show  an  adverse  trade  balance  well  in  excess 
of  the  great  loan  of  !".>1t!  (  1  l,:;i;o  noo.ooo  francs).  These 
figures,  however,  do  not  indicate  the  full  e.xtent  of  the  advcrn' 
trade  l>a!ance,  <ince  many  of  the  imports  on  i^overnment  account 
were  ni  t  included  in  them. 

.\s  we  have  earlier  seen,  France  had  difficulties  in  restricting 

'  L'lndim  F.roHomist.  October  14,  1916,  page  650. 
'  Ibid..  January  6,  1917,  page  14. 


FRANCE  136 

her  imports.  Relying  on  foreign  trade  to  supply  her  with  the 
necessities  of  the  war  instead  of  seeking  early  to  make  herself 
self-sufficient  in  those  matters,  she  had  had  a  revival  of  the 
production  and  export  of  luxuries  with  which  to  pay  for  the 
import  of  necessities.  This  policy,  seemingly  wise  at  its  incep- 
tion, when  the  volume  of  the  world's  shipping  seemed  adequate, 
presented  increasing  difficulties  as  the  submarines  grew  more 
deadly  and  as  the  available  shipping  of  the  world  became  scarce. 
It  led  to  a  further  complication  in  that  France  was  hampered  in 
her  efforts  to  check  the  importation  of  luxuries.  If  she  restricted 
the  importation  of  luxuries  from  other  countries,  they  would  re- 
taliate by  restricting  the  exjxjrt  of  l->ench  luxuries,  which  would 
hamper  France  in  her  efforts  to  pay  for  the  things  she  needed. 
But  in  March,  litlT,  following  England's  restriction  of  imports 
of  luxuries  from  France,  the  French  Government  took  vigorous 
control  of  foreign  trade  and  allowed  no  imports  except  by  the 
state  save  on  special  authority. 

In  these  figures  for  an  eleven  month  period,  we  have  indicated 
something  of  the  magnitude  of  the  problem  which  France  had 
to  face  in  tnaking  foreign  payment.  In  part  this  has  been  done 
through  direct  lx)rrowings  from  allies.  From  the  governments 
of  England,  the  United  States  and  Japan  and  from  private  in- 
vestors in  the  United  States  and  Japan.  France  has  borrowed  as 
follows,'  down  to  September  7,  1!)1S: 

EnKland    Fr.  9,781.665,000 

V""    ■   States    10,.125,000.000 

■'»t>»- .          390,000,000 

American  investors  (seven  principal  issue*)..  2,652  500000 

Japanese  investors   19.?,'440000 

Tot»l     Fr.  2IJ42T605,000 

The  seven  principal  issues  referred  to,  taken  by  American  in- 
vestors, are  rs  fo'lows: 

American  Foreign  Securities Fr.  472,500  000 

The  Anglo-French  Luan  (half ) '  1  250000000 

The  French   Republic  Loan SOO.'fWO.'oOO 

City  of  Pans  Loan 250.000,000 

City  of  rtonleaux  Loan 60,000,000 

City  of  Ivons  Loan 60,000,000 

City  of  Marseilles  Loan _60,000.000 

Total     Fr  2,652,500,000 

»t,Il^/,i''n''Jl''n''J"'lr'';i''''  '"'  "'"f  fi«'"'"  t"  the  .Statistical  Department  of 
the  .National  Bank  of  Commerce  in  New  York. 


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l.iO     EFFECTS   OF  THE   WAK  ON    MONEY,    CREDIT   AND  BANKING 

To  tliis  L';;,.!4i>,»!0r),()00  francs  must  be  added  large  sums  placed 
witli  Iuij,'lisli  investt)rs  hoth  through  private  agencies  and  directly 
l)y  the  I-icucii  Liovernment  in  connection  with  the  great  loans, 
and  various  smaller  loans  in  Norway,  Spain  and  other  countries, 
chieriy  short  term  credits  to  protect  the  exchanges.  There  have 
l)cen  other  similar  credits  of  ^hort  maturity,  now  largely  repaid, 
])laced  in  the  L'nited  States,  anil  to  some  extent  Americans  have 
invested  directly  in  the  war  loans  in  I'aris. 

in  partial  otVset  of  these  tlebts,  France  had  loaned  her  allies, 
Russia,  Italy,  iJelgiv'.m,  Serbia  and  Ronmania,  by  December  ;{1, 
lit  17,  (!,:)ti4,J!>4.1()()  francs,  and  has  jJHivided  in  her  budget  for 
additional  loans  to  allies  of  ."iCi.C.Ml'.IOO  francs  by  the  end  of  the 
fiscal  year  l!Us.'  Our  chapter  (m  the  IJanquc  de  France  has 
dealt  with  the  gold  policy  and  foreign  exchange  policy  of  that 
institution.  Certain  of  the  loans  placed  in  the  L'nited  States 
have  been  based  on  American  securities  )wned  by  I'rench  in- 
vestors mobilized  to  serve  as  collateral.  The  extent  of  this  has 
not  been  great.  I'rance  had  a  comparatively  small  amount  of 
.American  securities.  In  very  large  degree  indeed  the  foreign 
securities  held  in  l-'rance  were  not  of  a  sort  which  she  could 
dispose  of  in  other  markets.  There  has  l>een  during  the  j)ast 
four  years  little  enthusiasm  among  investors  outside  of  F'rance 
for  Russian.  Ihilgarian.  Itrazilian.  Turkish  or  Mexican  securi- 
ties. As  early  as  June,  l!il."i,  tiie  Trench  (iovernment  through 
the  great  credit  houses  l)egan  to  corral  .\merican  railroad  securi- 
ties, m  iking  favorable  terms  to  French  investors  in  these  issues. 
The  result  was  a  rise  in  the  Trench  bourse  of  .\merican  securities 
and  .,  cordial  response  on  the  part  of  I'rench  investors  to  the 
requests  of  the  governmtnt  and  the  banks.  Hut  the  total  amount 
involved  was  small.  .\  billion  francs  would  probably  cover  all 
the  .\merican  railway  securities  listed  on  the  French  lx)urse.'' 

Interesting  episodes  in  the  French  exchange  market  haxi  '  en 
the  collapse  of  rubles,  which  in  Xovember.  1!M7,  fell  as  low  as 
7.">  centimes  per  ruble  (alnnit  !.">  cents  as  against  a  par  of  over 
.^()  cents),  and  the  weakness  of  Italian  exchange,  which  reached 

'  ro<n,„„u    tloiU.  M.irrh  2.\.  lOlH.  patfo  410. 

'  London  l\i><i.>mist.  juiu'  1.'.  l"!?.  iml;.  LW  ;  June  2S.  1915,  pagi-  1299. 


FRANCE 


13( 


Its  low  point  at  about  the  same  time.    The  problem  of  Russian 
exchange  has  been  a  serious  concern  for  France  from  the  be- 
ginnmg.      In   February.   l!)ir.,  the  finance   ministers  of   Great 
Bntam.   France  and   ku,sia  met  in   Paris  for  the  purpose  of 
unitmg  the  financial  resources  of  the  Triple  Entente,  chiefiy  to 
protect    Russian   exchange   which   was  then   weakened  by   the 
failure  to  get  wheat  through  the  Dardanelles.     In  June.  1!)16. 
following   other   vinlcnt   fluctuations   in   pesetas,   a   credit    was 
secured  m  Spain  uf  iu.ooo.ooo  francs  monthly  for  six  months 
About  the  same  time,  England  and  France  negotiated  small  loans 
in  .\orway.    A  rise  in  Brazilians  in  London  in  May.  IDlti,  gave 
I-rance  some  opportunity  to  i)rofect  her  exchange  by  selling  the 
securities  in  the  London  market,  but  the  ability  of  the  London 
market  to  absorb  securities  'rom  other  countries  has  not  been 
great  enough  to  aid   substantially   in  the  enormous  exchange 
problem  which  France  has  had  to  face.' 

In  February.  l!)l(i.  a  loan  lor  ■I'od.noo.ooo  ( l.-,o.()(»(),()00 
francs)  was  i)lace(l  in  America  for  the  Schnei.ler-Creusot 
munitions  firm  through  twenty  syndicate  bankers  in  the  United 
States.  The  French  bankers  supporting  the  hjan  were  the 
Lnion  Parisienne.  Rothschild,  the  Cre.lit  Lvonnais.  the  Comp- 
toir  d-I'scompte.  the  Cre.lit  Industrie!  and  tlie  Ban.pie  de  Paris 
et  des  Pays-Bas.     But  this  i.  a  minor  rill  in  a  great  river. 

There  has  been  increasing  government  control  of  foreign 
e.xchange  operations,  particularly  .since  the  middle  of  1!»17 
Distinguished  IVench  financial  representatives  have  come  to 
America  more  than  once  thn.ugh  the  war  an.l  since  our  entry 
.nto  the  war.  The  IVench  High  G.mmission  in  Wa.shington 
and  the  Agence  l-inanciOr.-  in  .\ew  ^•ork  have  plaved  a  large 
role  m  securing  and  in  <lisbursing  I'mich  credits  in  the 
Imtod  States.  Throughout  the  war  the  firm  of  J.  p.  .Morgan 
&  C  o.  has  been  closely  associated  with  the  Briti.sh  and  I-rench 
Cjovernmiiiis. 

During  ihc  summer  of  ['.Ms  there  has  been  a  ditTerent  problem 
m  the  financial  relations  of  the  rnited  States  and  France  in  that 

M!.!ch"]5."im "'"■  ^''-   -^'  '""■  '''''•  '"^'^  ■■''^'■•"^''  Corrcpondcnce," 


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ins      KFFECTS  OF   THE  WAR  ON    MOXEY,    CREDIT   AND  BANKING 

the  American  armies  in  France  have  made  large  expenditures  in 
that  country  which  have  necessitated  the  securing  of  American 
credits  in  France.  The  details  of  this  operation  can  not  at 
present  be  stated.  It  is  probable,  however,  that  the  rapid  ex- 
pansion in  notes  of  the  Hanque  de  France  during  1918  had 
some  connection  with  this  problem.' 

One  factor  which  at  certain  periods  in  the  war  has  had  no 
small  influence  on  the  standing  of  French  exchange  in  neutral 
markets  in  Europe  has  been  the  efforts  of  the  German  Govern- 
ment to  purchase  French.  Russian  or  .\merican  bank  notes  as 
well  as  .securities  held  in  France  of  certain  Russian  and  Balkan 
industrial  corporations.  The  explanation  is  not  wholly  clear. 
Apjiarently  it  has  been  easier  for  Germany  to  make  payments  in 
tht  Ukraine  with  notes  of  the  Allies  than  to  use  her  o'vn  notes 
for  the  purpose.  The  desire  of  the  Germans  to  secure  the  stocks 
of  Russian  and  Balkan  corporations  has  apparently  been  due  to 
the  (ksire  to  get  control  of  these  corporations.  Steps  have  been 
taken  by  the  French  (Jovernment  to  check  the  export  of  such 
moneys  and  securities.- 

.\s  stated  above,  the  greatest  discount  on  the  franc  in  New 
York  was  something  over  12  per  cent  in  .\pril,  191  »i.  This  had 
dropped  to  aI)out  11  per  cent  by  March,  1917,  and  with  our  break 
of  diplomatic  relations  with  Germany  it  dropped  still  further  to 
a  trifle  over  H  per  cent.  The  low  since  then  was  in  September, 
1917,  when  a  K)  per  cent  di.scount  was  reached.  In  August,  1918, 
the  discount  on  l"reiich  money  in  Xcw  York  was  about  9  per  cent. 

From  SeptemlKT,  1914,  to  March,  191.'),  the  franc  and  pound 
sterling  moved  closely  together  in  New  York,  but  the  decline  in 
francs  in  191.')  in  Xcw  York  was  much  greater  than  that  of  the 
pound  sterling.  With  March.  1917,  however,  the  franc  made  an 
advance  while  the  pound  sterling  remained  unchanged.  In  a 
large  way.  it  may  be  said  that  the  franc  and  the  pound  sterling 
h.ive  shared  similar  fortunes  in  N'ew  York  with  the  franc  trailing 
substantially  in  the  rear.  On  the  whole,  the  slight  discotmt 
throughout   this  period   of   gigantic  expenditure   is  a   striking 

'  l.(in(li>n  Ecottotnisl,  }»\y  13.  1918,  paue  42. 


FRANCE 


139 


tribute  both  to  the  prestige  of  the  French  financial  system  and 
to  the  loyalty  of  Lombard  Street.  France  has  perforce  leaned 
heavily  on  England  in  dealing  with  the  exchange  problem.  Since 
March.  1917.  of  course,  it  has  been  almost  wholly  American 
credits  which  have  sustained  both  the  pound  and  the  franc. 


PART  II 
THE  UNITED  STATES 


CHAPTER  XIII 
New  York  at  the  Outbreak  of  the  War 

The  outbreak  of  the  war  found  the  United  States  with  a  very 
safe  credit  position.  Trade  was  dull,  merchants  and  bankers 
were  moving  under  shortened  sail,  no  great  new  enterprises  had 
recently  been  undertaken  and  the  general  situation  was  thor- 
oughly solvent.  There  had  l)een  indeed  no  real  boom  since  the 
panic  of  liM)7.  Ordinarily  following  a  panic  and  a  period  of 
depression  such  as  that  of  l!i(»7-T.»(»S.  there  comes  a  revival  of 
business  with  progressive  tempo,  culminating  in  a  period  of 
active  prosperity.  The  "  business  cycle."  as  we  know  it.  is  an 
alternation  of  prosperity,  crisis,  dejjression  and  prosperity  again. 
But  following  the  panic  of  1!»(>7  there  had  been  a  steady  drag. 
The  year  1!»0!>  had  been  an  active  year  and  IKK)  had  continued 
activity  with  some  reduction  in  the  tempo,  but  1011,  as  shown 
both  by  figures  for  prices  and  for  physical  volume  of  production 
(indicated  by  railroad  gross  receipts)  had  shown  a  sed)ack.  In 
r.)12.  there  was  a  substantial  rise  in  wholesale  prices  followed 
ty  a  substantial  setback  in  l!»i;!.  with  a  moderate  continuance 
through  l)oth  these  years  of  physical  productivity,  as  indicated 
by  railroad  gross  receipts.  But  there  had  lieen  nothing  follow- 
ing 1!)07  that  could  be  called  a  real  boom.' 

In  retrospect,  it  is  possible  to  offer  an  explanation  of  this, 
though  some  shrewd  observers,  as  Mr.  A.  D.  Noyes.  had  seen 
the  explanation  before  the  outbreak  of  the  war.  For  a  good 
many  years  l)cfi)re  l!tl4  Europe  had  seen  the  war  coming.  The 
Banque  de  France  as  early  as  1S!H)  l)egan  its  policy  of  accumu- 
lating gold,  primarily  as  a  war  chest.  Between  lSf>0  and  I'.HO 
the  Banque  de  France  increased  its  gold  reserves  by  7")  per  cent, 
but  increased  its  discounts  and  advances  during  the  same  period 
by  only  r.  per  cent.    In  general,  for  several  years  More  the  war. 

'  fiWr  the  present  writer's  ralur  of  Money,  page  278,   for  the  .statistic* 
referred  to. 

149 


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144     EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT  AND  BANKING 

European  investors  were  becoming  more  cautious  in  their  pur- 
chase of  American  securities  and  the  United  States  were  increas- 
ingly obliged  to  provide  their  own  capital  lor  industrial  develop- 
ments. As  a  debtor  country  accustomed  to  'm  rrovving  largely 
from  foreign  capitalists,  we  felt  a  drag  whci.  foreign  invest- 
ments in  our  securities  declined.  If  Europe  would  not  lend,  we 
could  not  so  readily  expand.  During  the  two  years  preceding 
the  war  particularly.  France  had  ijeen  unable  to  make  foreign 
investments  as  before.  The  investments  which  she  had  been 
making  in  the  years  preceding  1!)1l'  had  been  to  a  large  degree, 
as  we  have  seen,  in  Russians.  Bulgarians,  Argentine  securities, 
Mexican  securities  and  the  like,  and  French  investment  in  Amer- 
ican securities  had  very  largely  ceased.  With  slight  expansion, 
therefore,  we  were  well  prepared  to  meet  the  shock  of  the  war — 
in  striking  contrast  with  France  or  with  Brazil. 

In  one  respect,  however,  the  coming  of  the  war  found  us 
unfortunately  placed.  We  were  subject  to  heavy  calls  from 
Europe  for  go\d.  There  had  been  a  drain  on  New  York's  gold 
for  some  time  before.  Beginning  with  1!H2  Germany  had  been 
accumulating  gold  in  unusual  auKnmts  and  France  and  Russia 
began  early  in  IKH  a  rapid  accumulation  of  gold. 

Moreover,  from  March,  liiU,  to  .\ugust.  1914,  imports  to 
the  United  States  had  substantially  exceeded  exports  for  every 
month — something  unprecedented  for  many  years  before  the 
war.  An  excess  of  imports  over  exports  had  not  occurred  for 
more  than  a  month  at  a  time  for  a  number  of  years  preceding 
March,  1914.'  Europe  was  depressed  and  had  reduced  its  buy- 
ing. Our  ii  jrts  were  not  unusually  large,  but  our  exports  were 
unusually  small. 

July  is  normally  in  any  case  the  time  of  lowest  exports  from 
the  United  States,  while  our  exports  usually  grow  very  large 
shortly  thereafter,  culminating  in  October,  Xovember  or  De- 
cember in  very  heavy  shipments  of  grain  and  other  agricultural 
products.  It  has  been  a  long  standing  practice  of  .American 
bankers  to  tide  over  the  period  of  low  exports  in  July  by  draw- 

'  See  T..  r.  Sorell-  ■  Di^Incalioiis  in  the  Fnreien  Traric  of  ilie  fivtr,! 
^tato<;  r^csiiltmR  from  the  War,"  Journal  nf  Political  Ecnnowv,  J-inuarv 
1916,  page  28   (chart). 


THE   UNITED   STATES 


145 


ing  finance  time  bills  on  London  in  payment  for  imports  which 
they  liquidate  later  by  documentary  bills  '  drawn  on  London, 
connected  with  our  heavy  autumn  exports.  During  July,  1914,' 
the  usual  volume  of  these  short  term  finance  bills  had  been  drawn 
and  there  was  a  large  volume  of  current  indebtedness  by  New 
York  to  London  as  a  result. 

As  we  have  seen,  Xcw  York  bore  the  brunt  of  the  heavy 
selling  I)y  frightened  European  investors  of  securities  al  the 
outbreak  of  the  war.  These  securities,  sold  for  cash  in  the  New 
York  market,  gave  rise  to  an  enormous  volume  of  demand  in- 
debtedness on  the  part  of  New  York  brokers  to  their  European 
clients  and  enormously  increased  the  demand  for  sight  exchange 
on  London. 

At  the  same  time  the  shock  of  the  war  had  demoralized  the 
London  foreign  exchange  market  and  had  interrupted  the  rela- 
tions between   New   York  and  London  bankers  which  would 
ordinarily  make  possible  the  creation  of  a  new  supply  of  finance 
bills  on  London  with  which  to  make  these  payments.    Ordinarily, 
New  York  bankers,  if  they  are  willing  to  pay  the  interest  rates' 
demanded,  have  large  leeway  in  drawing  time  finance  bills  on 
their  London  correspondents,  which,  accepted  by  these  corre- 
spondents, may  be  discounted  in  the  London  market  and  provide 
cash  funds  against  which  New  York  bankers  may  draw.     But 
the  credit  of  the  London  acceptance  houses  was  heavily  shaken 
by  the  war  and  the  business  of  accepting  and  discounting  in 
London  was  practically  stopped  for  a  time.    The  only  way,  there- 
fore, by  which  New  York  banks  could  increase  their  supply  of 
sterling  exchange  was  by  the  actual  shipment  of  gold,  and  this 
became  impossil)le  after  England  declared  war  on  Germany  and 
the  seas  became  unsafe  for  shipping.     Under  these  conditions, 
exchange   rates  on   London   soared   to  unprecedented   heights. 
Five,  six  and  even  seven  dollars  a  pound  were  paid  in  certain 
cases.    These  high  rates  are  not  representative  of  an  organized 
market,  but  merely  of  the  virtual  absence  of  available  credits  in 

••■Docunicntary  bills"  are  bills  drawn  by  shippers  of  Ronds.  accompanied 
hv  documents  ev.dcnc.iK  the   fact  ,nml  value  of^be   shipment,,  as  bHls  of 

hy''ba'ni:^;rorLrkrrr'  ™""'"  •"^■°'"^-  '''■ "  ^•■■""-  •""»"  ^^  «^-- 


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140     EFFECTS  OF  THE   WAR  ON    MONEY,   CREDIT   AND   BANKING 

London  and  of  the  necessities  of  urgent  purchasers  anxious  to 
honor  their  (il)li^ations  in  London. 

In  this  unprecedented  situation,  tlie  New  York  stock  exchange 
was  forced  to  close.  In  all  its  long  history  this  institution  has 
!)een  closed  but  t)nce  l)efore,  in  the  panic  of  IST.'J,  and  then  only 
for  a  period  of  ten  days.  It  closed  July  ^51,  1914,  for  an  in- 
definite period  and  virtually  all  tiie  other  stock  exchanges  of  the 
I'nited  States  followed  its  lead.  It  was  not  until  Xovember  28, 
11»14.  that  it  was  reopened  at  all,  and  then  only  ur  bond  trading 
for  cash  or  "  regular  way  "  (i.e..  on  the  daily  settlement  basis) 
and  at  miniinuni  ])rices  fixetl  by  a  committee  of  the  stock  ex- 
change. On  Saturday,  December  1:2,  a  restricted  list  of  stocks, 
excluding  those  in  which  there  was  danger  of  heavy  inter- 
national selling,  was  admitted  for  cash  or  "  regular  way"  trad- 
ing again,  with  mininnim  prices  fixed  by  a  committee.  .Ml  stocks 
were  admitted  on  December  1."),  Iltl4,  but  minimum  prices  pre- 
vailed for  a  number  of  weeks  following.  .Ml  restrictions  on 
prices  were  finally  removed  on  April  1,  lit].'). 

The  >tock  exchange  was  in  a  fairly  stn)ng  position  in  July, 
1U14.  Prices  had  declined  since  early  in  the  year,  and  the  high 
])rices  of  I'-'l  1  were  not  high  as  compared  with  earlier  years. 
X'arious  uncertaiiuies  as  to  the  future  of  business  had  led,  more- 
over, to  a  large  sliort  interest  which  constituted  a  protection  when 
further  selling  should  come,  as  the  shorts  would  take  advantage 
of  further  declines  to  "  take  profits."  There  had  been  a  reduced 
volume  of  speculation  for  a  numln-r  of  years.  The  last  preceding 
year  of  real  stock  exchange  Jictivity  had  been  1!K)!1,  when  214,- 
OOo.iKM)  shares  were  .sold.  The  following  table  shows  a  steady 
decline  in  share  sales  from  that  year : 

Shares 

1009   214.000,000 

loin    I'i4,00(l,000 

1011    17.000.000 

loij  m.ooo.ooo 

10].?  s.iooo.ooo 

1014  47.000,000 ' 

Even  1909  had  not  been  a  year  of  extraordinary  stock  ex- 
change activity.    In  lOOfi,  2S4.OOO,000  shares  had  been  sold;  in 

'  E.\change  closed  for  over  three  months. 


THE   UNITED  ;T    I.    .  I47 

1005.  263,000,000;  in  lUOl,  2tJ(J.000,  >'  A  number  of  other 
years  had  approached  VJO'J  in  magnitude.  One  must  go  back  to 
l!3!>7  to  find  a  year  in  which  share  sales  were  as  low  as  1913. 
The  volume  of  stock  collateral  loans  on  June  30,  lUU,  in 
New  York  City  banks  was  substantially  larger  than  it  had  been 
in  1913.  if  figures  for  collateral  loans  of  national  banks  may  be 
taken  as  representative.    The  following  table  will  show  this : ' 

Sci,tcmbt:r  1    1910  $517,0(X).0(X) 

l"""   ^,  '?ih 520,000,000 

June  4,  19  2 550,000.000 

J""*-'  i-^  l^U^ 506,000,000 

June  JO,   1914 627,000,000 

The  quiet  selling  that  had  been  g(jing  on  on  the  part  of 
European  investors  for  some  months  Ijefore  the  outbreak  of  the 
war  had  evidently  led  to  some  expansion  of  bank  collateral 
loans.  None  the  less,  this  volume  of  collateral  loans  was  not 
alarmingly  great,  and  both  the  banks  and  the  stock  market  were 
in  good  position  to  meet  any  ordinary  emergency.  New  York 
had  at  all  events  one  advantage  over  London  and  Paris,  in  that 
the  daily  settlement  prevailing  in  New  York  made  it  possible  to 
test  the  solvency  of  brokers  every  day  and  there  was  no  fort- 
night's accumulation  of  weakness  when  the  shock  came. 

But  the  emergency  that  came  was  one  that  could  not  b  >  met. 
In  certain  securities  held  in  large  quantities  by  European  in- 
vestors the  selling  was  terrific  and  the  declines  in  prices  were 
startling.    Among  these  were : 

.     u-  High,  1914  July  30,  1914  Decline 

Atchison    .......•: 100)^  89-/.  m" 

Baltimore  and   Ohio... 98.^  72  26W 

Brooklyn   Rapid   Transit    94' ^  79  15,? 

Canadian  Pacific  220;  i  156>-i  64W 

Chesapeake  and  Ohio 68  41  i/,  ofit/ 

U-  S.  Steel 67J4  50'/.  16^ 

'Comftrollcrs  Rcfort    \9U,yo\.  2,   page   736.     The   collateral   loans  of 

h^nd'l-'Ill^f'r^i  1'"  •^^'\.'*"^'' ,<-■«>•  f^V""t  fully  typical  of  total  stock  and 
bond  collateral  loans.  First,  obviously  because  tliev  do  not  include  the  State 
banks,  trust  companies  or  private  banks,  and,  second,  because  thev  do  include 
certain  loans  on  "  other  collateral  security."  including  warehouse  receipts 
chattel  mortgages,  etc  On  the  whole,  however,  these  other  elements  are  of 
comparativdy  minor  importance  in  New  ^'ork  and  it  is  probable  that  the 
stock  and  bond  collateral  loans  of  the  trust  companies  and  State  banks 
tend  to  txpand  and  contract  under  the  same  conditions  that  those  of  the 
national  kmks  do,  t  is  interestinc  to  note  that  the  figure  for  1013  is  lower 
than  the  figure  for  1904  (538,000,000).     r,de  Value  of  Jl/(,«o'.  page  511 


I 
I 


!;i 

frr 

i.t  I 

\ 

i 

In 

■ 

i  :i 

i  i 

i  i 


i 
I 


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i 


14S     EFFECTS  OF  THE   WAR   O.N    MONEY,    CREDIT   AM)  BANKING 

The  •general  averaiios  also  showeil  startling  declines.    Twenty- 
five  typical  railway  stocks  had  an  average  price  of  7SAS  at  the 


em 


1  of 


.  i.     riicv  declined  to  tit;.7,s  [or  tlieir  clo; 


ing  prii 


in  July.      1  »venty-li\e  typical  industrial  stocks  which  had  a  ch 
inj^  price  of  r.s.iit  in  June    litl4,  dropped  to  4S.Tt)  hv  the  end 


if   liih 


Tlu 


jnil) 


(1 


thes 


lils  and  industrial 
dropped  from  tl>.is  at  the  end  of  June  to  r)7.7T  by  the  end  of 
July.  The  decline  in  bond  prices  was  less  dramatic.  Forty 
rei)resentative  bonds  had  as  an  average  closing  price  at  the  end 
of  June  >•!..".•;.  and  their  price  when  the  stock  e.xchange  closed 
was  sl'.T:).' 

The  actual  volume  of  sales  made  in  July  was  not  extraordi- 
narily large  as  compared  witii  many  other  periods.  On  Tuesday. 
July  L"».  when  a  great  break  came  in  the  list.  1,<>l'(»,0()()  shares 
were  sold.  The  stock  e.xchange  has  on  several  occasions  ex- 
ceeded two  million  shares,  with  jnuch  less  change  in  prices.  The 
^ignit^cant  points  in  connection  with  this  selling,  however,  are 
first,  that  it  was  selling  by  investors  rather  than  by  speculators, 
and,  second,  that  it  was  selling  by  foreigners  rather  than  by 
domestic  sellers.  .\  moderate  amount  of  selling  by  investors  may 
make  a  mucii  greater  difference  in  the  course  of  security  prices 
than  enormous  sales  by  speculators,  since  the  specidators  selling 
short  remain  a  potential  buying  power  in  the  market  and  sine 
the  short  seller  provides  loan  funds  to  the  bull,  from  whom  he 
Ixtrrows  the  stocks  which  he  must  deliver.  The  investor,  how- 
ever, who  sells  withdraws  funds  iron\  the  loan  market.  The 
case  is  intensified  when  the  seller  is  a  foreign  investor,  because 
the  foreigner  not  merely  withdraws  funds  from  the  loan  market, 
hut  tends  also  to  withdraw  gold  from  the  reserves  of  the  banks, 
restricting,  lemiiorarily.  their  ability  to  expand  loans  to  protect 
the  market.-  With  New  N'ork's  gold  supply  already  ^ubject  t  > 
calls  from  Iuiroi)e  for  the  other  reasons  already  mentioned,  this 

'  Tlif  M-ciirilti's  clio'.rn   for  tin-  tiniirfs  arc  those  ti'><il   liy  the  .Vew  \nrU 
I  iiin's   .Inniilisl. 

I  lii<  iv   miitli  lo»  true   iii   Idiiddii  nr   Pari*  lh;in   it   was  in    \>w  N'ork 

liffiire  l'*I7,  siiu-c  \i-w  N'nrk  «as  -ulm-iM  tn  iiitil  r.  vcrvi'  ri.|itirfnuMil<>  Ihe 

iiiiun.lnnnl^  In  llir  rciliral  Uimtvc  \.t  in  l'il7  li.ivi-  virtiiallv  >lonf  away 
witli  Icttal  rtvtr\»-  rninirrmdil*.  a-  wt  -liall  mx  in  tin-  ili.ipiir,  iiifr,i.  on  tlii- 
Ifdvial  rt'><rvc  «\>.ti-ni. 


THE    UNITED   STATES 


149 


further  cause  for  a  drain  placed  the  banks  in  a  difficult  position 
when  It  came  u,  providing  funds  to  .sustain  the  market. 

The  closins  «f  the  stock  exchan,i,-e  was  necessary.  Had  it 
remamed  open  another  day.  the  l.reak  in  prices  would  have  been 
disastrous.  1  he  margins  protecting  collateral  loans  at  the  banks 
would  have  been  hopelessly  wiped  out  and  bank  resources  tech- 
nically ,mpaire<l.  IJoth  in  the  interests  of  the  banks  and  of 
brokers  an.l  brokers'  customers,  it  was  imperative  that  the  ex- 
change be  closed,  and  inasmuch  as  .langer  to  the  banks,  brokers 
and  the  brokers'  customers  would  have  involved  the  whole  credit 
system  ot  the  country,  it  was  essentially  in  the  interests  of  the 
country  that  the  exchange  k-  closed. 

The  (|uestion  has  been  raised  as  to  whether  it  might  not  have 
been  a.lvantageously  closed  a  day  or  two  earlier,     it  is  the  view 
of    IVoiessor  C.    M.    W.   .Spr.-.gue  and    Mr.    U.    (]    ^     Xobie 
Presulent  of  the  stock  exchange,  that   it  is   fortunate  that  the 
exchange  stayed  open  as  long  as  it  did.     Stock  prices  went  low 
init  not  so  low  that  the  banks  c.uld  not  stand  the  strain      The 
market  was  pretty  thoroughly  li,|ui.late(l.     .\  reopening  of  the 
exchange  was  thus  made  much  easier  than  would  have  been  the 
case  had  stocks  remained  at  a  higher  level  with  many  sellers 
anxious  to  li(|uidate  while  the  exchange  was  closed.'     The  con- 
trol over  .selling  outside  the  exchange  during  the  perio.l  while 
the  exchange  was  dose.l  would.  ni.,reover.  have  l)een  much  less 
etfecnve  had  not  the  market  U-en  thon.ughly  licjuidated.      \s  Mr 
Xoble  makes  clear  in  his  interesting  pape'r.  the  closju^r  ,,1   the 
stock  exchange  was  accumpanie.l  by  a  rigonn.s  control  over  auc 
tion   rooms,  the  curb  and  all  other  outside  markets    an.l   the 
volume  ..t  security  selling  was  hel.I  within  verv  narrow  limits 
indee.l  during  the  perio.l  the  stock  exchange  remained  dosed 

Apart  Iron,  the  closing  of  the  st.K'k  exchange  other  emergeticy 
measures  were  called   for.     As  has  alwavs  happened  m  crises 
the  New  Nork  banks  were  subject  to  domestic  drains  on  their 

/:,vj.,„m.    AVf  „•;,.,  Spl.nil,,,.  1-15;  II    ( .    S.  .V   bl^  '     he  \V*  N  '  r  v^^^^^^^ 


150 


EFFECTS  OF  THE   WAR  OX    MONEY.   CREDIT   AND   BANKING 


cash  reserves  in  addition  to  the  calls  from  Europe  for  gold. 
Diirinj,'  the  week  ending  July  ;J1.  the  clearing  house  hanks  and 
trust  companies  in  \ew  York  lost  $.j<t,00O,(i()U  in  cash  reserve, 
of  which  $iM»,()OO.OliO  represeiiicd  withdrawals  by  American  and 
Canadian  banks.'  Resort  was  had  to  the  use  of  clearing  house 
certificates,  as  had  l)een  the  case  in  previous  crises.  The  clearing 
house  certificate  is  an  instrument  issued  by  the  clearing  house  to 
the  banks  upon  collateral  depositetl  by  the  bank  with  the  clearing 
house,  it  represents  a  pooling  of  the  credit  of  all  the  banks  and 
is  good  in  payments  between  banks  at  the  clearing  house.  The 
bank  whose  cash  reserves  are  low  is  thus  enabled  to  protect  itself 
against  drains  at  the  clearing  house.  The  clearing  house  cer- 
tificate, however,  is  good  only  in  payments  between  banks  which 
are  members  of  the  same  clearing  house.  It  is  of  no  use  to  a 
New  York  bank  subject  to  drain  from  the  outside. 

Previous  crises  have  meant  that  the  New  York  banks  have 
suspended  cash  payments,  but  in  lit  14  there  was  a  further  remedy 
available.  The  .\ldrich-\reeland  Act  of  litos  had  been  designed 
to  enable  national  banks  to  issue  notes  freely  in  a  crisis.  This 
act  was  to  have  expired  by  limitation  on  July  1.  I'.tll.  but  the 
Federal  Reserve  .Act  .>f  I'.tl'i  forttmatdy  extended  it  for  another 
year  to  provide  against  emergencies  pending  the  inauguration  of 
the  federal  reserve  system,  and  amended  it  by  reducing  the  tax 
on  notes  issued  luider  the  AMrichA'reeland  Net  from  .1  per  cent 
to  ■•{  per  cent  during  the  first  three  months  of  issue,  thereafter 
increasing  it  by  'L-  |)er  cent  a  month  to  ,i  maximum  of  ft  per  cent, 
where  the  original  act  had  provided  for  increases  of  1  per  cent 
a  month  to  a  maximum  of  lo  \wr  cent.  Certain  other  restric- 
tions in  the  original  Aldrich-X'reeland  Act  had  Ihtd  removed. 
Xo  use  hatl  l)een  made  of  the  Aldrich-Vreeland  Act  prior  to 
this  emergency.  The  very  term  "  emergency  currency  "  had  been 
an  obstacle.  I'.anks  h;ul  feared  that  it  would  be  a  confession  of 
weakness  should  they  make  use  of  the  .let.  Mut  at  the  outbreak 
of  the  war  speedy  resort  w.is  had  to  it  and  the  new  notes  were 
issued  in  large  volume.  Indistinguishable  in  form  from  ordi- 
nary national  bank  notes  (except  that  they  were  new  and  clean), 
'  Spraguc,  of.  ill.,  pagi  517. 


THE    UNITED   STATES 


151 


they  were  accepted  readily  by  the  people.  Banks  paying  them 
out  were  enabled  to  retain  their  gold  and  "  lawful  money  "  as 
reserve.  In  all,  2,197  of  the  7,600  national  banks  became  mem- 
bers of  the  currency  associations  which  issued  these  notes.  The 
total  amount  of  the  Aldrich-Vreeland  notes  approved  for  circu- 
lation was  $yiS0,440,215  and  the  maximum  outstanding  was 
$386.61 0.yitO  on  October  24,  li)14.  Redemption  of  this  cur- 
rency began  as  early  as  October,  1U17.  By  December  20,  re- 
demption had  amounted  to  $217,000,000  and  on  July  1,  1915, 
all  but  $200,000  of  the  authorized  issue  had  been  retired.'  This 
emergency  currency  made  it  wholly  unnecessary  for  the  banks 
to  suspend  cash  payments  and  the  panic  was  safely  passed  with- 
out suspension. 

The  crisis  of  1914  is  unique  in  our  history  in  that  it  was 
wholly  di'-  to  external  causes.  As  we  have  seen,  the  internal 
situation  "  is  thoroughly  solvent.  Writing  in  the  summer  of 
191.1,  Professor  Sprague  was  able  to  date  the  end  of  the  crisis 
in  the  United  States  at  November,  1914.  except  for  the  cotton 
growing  southern  States.  Cotton  was  indeed  hard  hit.  The  cur- 
rent crop  was  16.000,000  bales,  a  record  crop.  Demoralized  by 
the  prospective  loss  of  the  European  market,  cotton  broke  in 
price  at  the  same  time  stocks  did.  at  the  end  of  July,  and  the 
cotton  exchange  closed  when  the  stock  exchange  closed,  the 
closing  price  l)eing  lO-.^O  cents  per  pound.  The  cotton  exchange 
reopened  in  November.  1916.  with  quotations  at  7.50  cents  a 
pound,  while  cotton  was  being  sold  in  the  south  at  5  to  6  cents 
a  pound.  The  emergency  was  real,  and  under  the  leadership  of 
the  Federal  Reserve  Board,  banks  in  nortliem  States  subscribed 
a  fund  of  $100,000,000.  while  southern  banks  provided 
$:),'.,000,(»00  as  a  fund  for  cotton  loans.  Very  little  use  was 
made  of  this  fund,  however.  .\  decided  increa.se  in  the  foreign 
demand  for  cotton  which  came  early  in  January.  191.').  from 
luirope  brought  cotton  up  to  9  cents  by  the  end  of  January,  and 
10  cents  by  the  enil  of  February.  From  that  time  on.  there  has 
hem  no  serious  <lepres-;ion  thnni^'h  1.t'<  of  demand  at  reason- 
able prices  in  any  of  .  •  major  indus.ries  of  the  I'nited  States. 
'Journal  of  llw  .Imfriian  Umlffs'  .hsociaiwH.  May,  1910,  pagi-  10.J9. 


ill 


lA 


III 


If 
I 


!' 


^1 

11 


t 


152     ICFFECTS  OF  THE  WAR   ON    MONEY,   CREDIT  AND  BANKING 

TIk-  i,'eiKT;il  situation  rc{,^arding  commercial  credit  in  the 
United  Slates  ha>  been  on  tlie  wliole  surprisingly  satisfactory 
during  tlie  war.  Tlie  outl)reak  ot  the  war  led  to  a  sui)Stantial 
increase  in  failures,  as  was  to  be  expected — l'l',i)uo  in  TJl.")  as 
against  Iti.OlH)  in  I'.H:;.  The  numl)er  of  failures  has  markedly 
declined  in  I'.iKi  and  IHIT,  while  for  the  first  nine  months  of 
liM>  the  figures  are  even  lower.  The  following  figures  are  taken 
from  Dun's  Rcz-iczk'  of  January  5,  lltlh  ; 

Number  of  .Amount  of  Avi-rage 

Year  Failures  Liabilities  Liabilities 

l'>i'"   10,f,8J  U9..'()1.515  $1I.1.=;9 

IVii/       11  .r.'.S  197„W.';.2_'S  If,  HU 

lytJ,S   ]},(,<)']  22.'„n5,()«4  14.1(,9 

1909    ij.<)_>4  lS4,r,0.!.46S  ll.')(,.? 

I'^l"   l-'.'oi  201.757,097  15.947 

1'>11    1.V441  191,0^,1,(^,5  l.l..'15 

I'^l-   I.r452  2().?,117..W1  1.V145 

I'^l'^    I".0,i7  272.672,2«S  17.0(U 

iyi4   l.S.'SO  .157.'WI8  859  19  579 

191.^    22  1?()  ,102.2Sr,.14«  1,<.M4 

1^16   U,,9<i,f  I9t,.2\2  '^6  1 1  S47 

1917   Li  855  18X441,371  13,168 

\umher  of 
F.Tibirci  \s«i'iv  Liabilities 

Fir>t  9  in,.s.  of  191,'<  8,0f)9  $75,142.7,' i  $122,975,024 


CHAPTER  XIV 

Gold,  Foreign  Trade  and  Foreign  Exchange 

We  have  seen  that  New  York  had  Ixjen  subject  to  heavy  drains 
of  gold  for  some  time  before  the  war.  The  excess  of  exports 
over  imports  of  gold  in  lin.'i  was  over  .$l>8,(H)(>,00(»;  to  the  end 
of  June,  I'JU,  it  was  .$,S4.00(),00() ;  and  for  the  whole  of  1!)14, 
$lt!r),0O0,()O().  One  factor  which  complicated  the  situation  in 
the  crisis  of  1!M4  was  the  fact  that  New  York  City  had  short 
term  obligations  maturing  to  the  amount  of  $100,000,000.  of 
which  $S0.()0(),000  were  held  in  Kngland  and  I>ance.  With 
London  exchange  almost  unattainable,  the  city's  obligations  were 
in  danger  of  dishonor.  To  protect  the  credit  of  the  city,  a  syn- 
dicate, in  which  all  but  four  of  the  i;50  Iwnks  and  trust  companies 
of  New  York  participated,  agreed  to  supply  gold  or  exchange  as 
might  be  necessary.  .\s  a  further  means  of  protecting  the  coun- 
try's reputation  for  honoring  gold  obligations,  a  gold  pool  of 
$100,000.0(10  was  organized  under  the  guidance  of  the  Federal 
Reserve  Board  involving  the  clearing  hou.se  banks  of  all  the 
reserve  cities.  Shipments  of  gold  to  the  depository  of  the  Bank 
of  luigland  at  Ottawa  by  this  pool  proved  .sufficient  to  ease  the 
situation  greatly  and  to  bring  sterling  exchange  down  to  a 
reasonable  figure. 

But  it  was  less  these  emergency  measures  than  it  was  the 
tremendous  volume  of  foreign  demand  for  .American  products 
for  war  purposes  which  l)rouglit  relief  from  the  critical  situa- 
tion. In  ()ctoI)er  the  United  .States  lost  )|;44.0(M1.0OO  of  gold; 
in  November  they  lost  $7,0(>(t,0(M);  in  neceml)er.  the  tide  turned 
and  the  rniled  States  gainc<I  about  1|I4.000,000  lut  excess  of 
Miiports  over  exp.irts  oi  gold.  The  explanation  is  of  course 
the  very  heavy  shipments  of  commodities  on  European  account. 
From  DecemlKT,  1!M4.  to' May.  1!M7.  the  United  States  gained 

tss 


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1.".4      KlKKCrS  OK   THE  WAR   ON    MONEY,   CREDIT  AND  BANKING 


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XN33  tl3d 


THE    UNITED   STATES 


155 


gold  at  a  rate  never  dreamed  of  before.  In  1<J15  the  excess  of 
imports  over  exports  of  gold  was  over  $420,000,000;  in  1»16 
over  $520,000,000  and  in  1!)17  over  $180,000,000,  a  net  gain 
for  the  three  years,  l'J15-l!)17  inclusive,  of  $1,111,000,000  in 
gold,  and  a  gain  of  more  than  a  billion  from  the  outbreak  of 
the  war. 

On  April  1,  1!)17.  the  general  stock  of  gold  coin,  including 
bullion  in  the  Treasury,  was  estimated  at  $;J,O,S!».O0O,O0O.  The 
United  States  have  lost  gold  somewhat  since  that  time,  the  figures 
standing  on  April  1.  HUH.  at  $;{.04;{,000,000— a  figure  which  has 
Ijeen  changed  little  since,  owing  to  the  rigorous  control  of  gold 
shipments  under  the  Federal  Reserve  Board's  gold  policy,  later 
to  lie  discussed. 

The  most  significant  consequence  of  this  huge  Hood  of  gold  is 
to  be  found  in  the  money  rates  in  the  New  York  market,  illus- 
trated by  the  accompanying  chart  for  call  rates.     During  the 
period  when  the  stock  exchange  was  closed  and  when  the  drain 
on  New  York  for  gold  was  heaviest,  the  call  rates  went  up  to  8 
per  cent,  though  favored  customers  were  charged  only  0  per 
cent.    These  rates  were  of  course  not.  strictly  speaking,  call  rates. 
Since  the  stock  market  was  closed  and  the  banks  could  not  sell 
the  collateral  on  which  the  loans  were  made,  it  was  impossible  to 
call  the  loans.    They  were  in  fact  undated  time  loans.    With  the 
turn  of  the  tide  of  gold  in  December,  however,  and  with  the 
reopening  of  the  stock  exchange,  the  rates  dropped  rapidly  and 
for  over  a  year  from  January,  1)>15,  to  May,  ]!)16,  New  York 
enjoyed  a  period  of  the  easiest  money  rates  ever  known  in  the 
history  of  the  Street.    The  "  high  "  on  call  rates  ;  t  the  "  money 
post  "  of  the  stock  exchange  was  iVi  per  cent,  the  "  low  "  was  1 
per  cent,  and  the  general  range  was  from  1  %  to  2  per  cent.    It 
was  not  until  the  heavy  financial  operations  of  the  government 
in  the  summer  of  1{)17  that  call  money  got  as  high  as  5  per  cent 
again.     This  easy  money  undoubtedly  facilitated  greatly  the  in- 
dustrial recovery  which  followed,  accelerated  the  volume  of  pro- 
duction and  enormously  accelerated  the  volume  of  exchanges, 
made  easier  the  financial  transactions  required  in  the  starting  of 
new  enterprises  t.)  meet  the  war  demands  and  was  a  potent  factor 


I 
I 

ill 


I 
I 


I 


156     EFFECTS  OF  THE  WAR  ON    MONEY,    CREDIT   AND  BANKING 

in  the  marvelous  mobilization  of   the   industrial   resources  of 
America.' 

ToreiRn  demand,  directed  first  toward  grains  and  munitions 
in  the  fall  of  lt»14,  gradually  spread  over  a  wide  range  of  Ameri- 
can products;  while  domestic  demand  from  the  industries  made 
prosperous  by  European  demand  quickened  every  field  of  Ameri- 
can industry.  The  story  of  the  industrial  recovery  and  expan- 
sion of  the  United  States  will  best  be  told  in  the  following  table 
indicative  of  physical  volume  of  production  in  which  the  physical 
production  in  IIUO  is  counted  as  100  per  cent: 

Per  cent 

1910  100.0 

1911  99.0 

1912  106.9 

1913  112.5 

1914  104.S 

1915  110.0 

1916  129.0 

1917  131.3' 

1918  124.8 

The  rising  volume  of  production  was  accompanied  by  and  in- 
deed largely  caused  by  rising  prices  (the  explanation  of  which 
we  shall  take  up  in  a  later  section)  and  the  combination  of  rising 
l)liysical  volume  of  production  and  rising  prices  led  to  a  wholly 
extraordinary  increase  in  the  income  of  the  people  of  the  United 
States,  as  indicated  by  the  following  table : 

1910  $30,500,000,000 

1911   29,600,000,000 

1912  33,800,000,000 

1913  34,800,000.000 

1914  32,600,000,000 

1915  35,400,000.000 

1916  49,200.000,000 

1917  68,600,000,000 

1918  73,400,000,000 

The  comparative  importance  of  foreign  and  domestic  trade  as 

'  But  it  is  possiMt  to  question  this.  London  was  losing  gold  heavily 
(luring  this  same  i)eriod,  and  yet  London  discount  rates  were  kept  low  on 
the  whole.  See  charts,  infra,  appendix.  London,  however,  was  not  on  a 
strict  gold  basis. 

'  Tliis  index  of  ph>sic;it  volume  of  production  is  b.Tsed  on  railroad  gross 
rece-  i'^  for  the  years  1910  to  1916,  inclusive.  For  1917  and  1918,  a  different 
nutliod  is  employed.  For  the  method  of  this  computation,  see  the  present 
writer's  /  .i/iic  of  Mnney,  appendix  to  chapter  13,  and  Annalist.  January  6, 
1919,  panes  .S-6  and  61. 


THE    UN'ITED   STATES  157 

this  rapid  expansion  went  on  is  indicated  by  the  following  table 
showing  the  ratio  of  foreign  to  domestic  trade : ' 

Per  cent 
I9i0    go 

1911 ;:;::::::::::::;;:  nu 

1912  6 

1913  lis 

1914 ;;;:;::;:   7 

I91S  11.4 

1916  17.9 

1917 13  7 

1918 :;::::::;:::;:  13:4 

The  apparent  decline  in  the  ratio  of  foreign  to  domestic  trade 
in  1917  and  1918  does  not  mean  that  the  volume  of  physical 
exports  was  comparatively  reduced  in  these  years.  An  enormous 
volume  of  exports  was  sent  on  account  of  the  American  Govern- 
ment itself  to  France  which  did  not  get  into  the  export  figures. 

The  heavy  foreign  purchases  in  the  United  States  led  to  in- 
creasing diflRculties  in  making  payments.  It  was  impossible  for 
the  belligerent  countries  to  pay  for  the  goods  we  sent  them  with 
goods  produced  by  them  exported  to  us.  The  balance  of  trade 
grew  ever  greater.  From  July  1.  1914,  to  July  31,  1918.  the 
total  excess  of  our  merchandise  exports  over  imports  was  $10.- 
110,000.000,  virtually  all  of  which  represented  a  debt  of  the 
European  belligerents,  as  our  increasing  exports  to  various  neu- 
trals were  largely  offset  by  exports  from  those  neutrals  either  to 
us  or  to  Europe.  Part  of  the  consequence  of  this  heavy  trade 
balance  we  have  already  seen  in  the  enormous  shipments  of  gold 
which  we  received.  An  early  consequence  of  it  was  a  decline  in 
the  exchange  rates  of  the  leading  belligerents  in  the  New  York 
foreign  exchange  market,  as  shown  by  the  chart  opposite  page 
ISS.  The  decline  in  the  pound  sterling  in  the  summer  of  191,5  to 
something  like  $4.50  per  pound,  though  less  dramatic  than  the  de- 
cline in  many  other  rates,  was  still  the  subject  of  perhaps  most 
comment  in  view  of  the  importance  of  sterling  exchange.  A 
detailed  account  of  the  exchange  rates  in  New  York  for  the 
various  countries  during  the  war  would  be  fascinating,  but  lies 
beyond  the  scope  of  the  present  discussion.     We  shall  content 

'  The  basis  of  this  estimate  is  contained  in  the  same  sources. 


'  l\ 


}H 


* 


It 


158     EFFECTS  OF  THE   WAR  ON    MONEY,   CREDIT   AND   BANKING 

ourselves  with  an  effort  to  estimate  the  main  factors  involved  in 
protecting  the  exchanges  in  New  York  and  in  paying  for  the 
great  excess  of  American  exports  and  with  comment  upon  some 
of  the  more  interesting  episodes  in  the  history  of  these  rates. 
The  charts  themselves  will  supply  further  details.  In  an  address 
before  the  national  convention  of  the  American  Institute  of 
Banking  in  Denver,  in  September.  1018,  }\:  John  K.  Rovensky, 
Vice  President  of  the  National  Bank  of  Commerce  in  New  York, 
undertook  to  cast  a  balance  showing  how  we  have  been  paid  for 
our  exports,  as  follows : 

Here  it  may  be  interesting  to  analyze  how  our  huge  favorable  trade  bal- 
ance was  financed  ;  in  other  words,  what  did  we  receive  in  exchange  for  the 
crimmoditics  we  exported  ? 

The  merchandise  trade  balance  plus  the  silver  export  balance  amounted 
to  a  little  over  ten  billion  dollars.  In  return  for  this  we  received  gold  to 
the  extent  of  about  one  billion  dollars;  we  had  returned  to  us  about  two 
billion  dollars  of  our  own  securities  that  had  been  held  abroad;  and  we 
arranged  to  loan  our  allies  and  other  foreign  countries  about  7'  j  billion 
dollars.  This  makes  a  total  of  about  lO'i  billion  dollars.  The  difference 
between  this  figure  and  the  export  balances  mentioned  above  amounts  to  a 
quarter  billion  dollars.  This  amount  is  probably  represented  by  loans  that 
have  been  made  to  allies  and  others  and  have  not  yet  been  used,  increase 
in  cash  balances  of  foreign  banks  in  the  United  States,  merchandise  paid 
for  and  not  yet  exported,  etc. 


T.ABLE    SHOWI.VG    NET    FOREIGN    TRADE    BALANCES    AND 
METHOD  OI-  FINANCING  SAME  SINCE  JULY  \,  1914 

(In  millions  of  dollars)' 

Excess  of  merchandise  exports  over  imports,  Julv   1,   1914- 

Jiily  M.  1918 ■ 10,110 

Excess  of  silver  exports  over  imports,  July   1,  1914-July  31, 

1918    ...*.,..        195 

Total    10„105 

Excess  of   tiold  imports  over  exiiorts,  July   1,   1914-July  31 

,.     l'^l«    1.043 

Liiiltd   Stales  securities    repiircha.^ed    January    31,    1915,    to 

January   31,    191" 1743 

United  States  repurchased  since  January  31,  1917  (estimated)       250 
Loan>  by   United   States  Guvcrnnienl   to   .Mlicd  countries   up 
to   AiiKiist   1,   1918.  less  iinavailed  balances  of  loans  and 

less  $M).nnn,000  credit  by   Ar^reiitiiia 6,029 

Loans  by  uidividiials  to  foreign  countries  to  August  31,  1918.     1,500       10.5'i5 

Balance     260 


V 


THE    UNITED   STATES  159 

A  different  estimate  by  Mr.  O.  P.  Austin,  statistician  of  the 
National  City  Bank  of  New  York,  would  place  the  securities 
brought  back  from  Europe  to  America  at  between  $3,000,000,000 
and  $4,000,000,000.' 

The  following  tallies  prepared  by  the  statistical  department  of 
the  National  Bank  of  Commerce  in  New  York  are  believed  to  be 
as  accurate  a  statement  as  it  is  now  possible  to  make  of  the  loans 
placed  in  the  United  States  by  foreign  governments  during  the 
war,  either  with  the  United  States  Government  directly  or  with 
American  investors. 

CREDITS  EXTENDED  BY  THE  UNITED  STATES 
(To  September  26,  1918) 

Great  Britain  $3,745,000,000 

France    2,065,000,000 

Italy    860.000,000 

Russia  325.000,000 

Belgium   157.020.000 

Greece    15.790.000 

Cuba  15.000.000 

Siberia   12,000.000 

Liberia   5.000,000 

Roumania    6.666.666 

Total    $7,206,476,666 

FOREIGN  GOVERNMENT  SECURITIES  IN  THE  HANDS 
OF  AMERICAN  INVESTORS 

United  Kingdom  of  G,    -t  Britain  and  Ireland $300,000,000 

United  Kingdom  of  Great  Britain  and  Ireland 250.000,000 

Dominion  of  Canada 75,000.000 

Dominion  of  Canada 100.000.000 

Anglo-French  loan 500.000.000 

American  Foreign  Securities  Co 94.500,000 

French  Republic  100,000,000 

City  of  Paris 50.000,000 

City  of    Bordeaux 12,000.000 

City  of  Lvons 12.000,000 

City  of   Marseilles 12,000.000 

Italian  Government   25.000.000 

Imperial  Russian  Government 25.000.000 

Government  of  Switzerland 5.000000 

Kingdom   of   Norway 5  000000 

Gnvcrnmcnt  of  Argentina  25.000,000 

Republic  of  China 5,000,000 

Total     $1,595, .500.000 

The  chart  for  exchange  rates  in  New  York  on  belligerent 
countries  shows  virtually  all  rates  adverse  to  New  York  at  the 
'  Economic  World.  August  17,  1918.  page  223. 


360     KFFECTS  OF   THE  WAR  ON'   MOXEY.   CREDIT   ANU   BANKING 

outbreak  of  the  war  turning  favorable  to  New  York  in  all  cases 
by  March,  liur,.     With  the  exception  of  the  rate  on  Yokohama, 
none  of  the  rates  on  belligerent  countries  have  been  above  p->r 
since  that  date.     The  course  of  French  exchange  we  have       - 
cussed  in  a  previous  chapter.    The  course  of  London  exch 
is  fairly  simply  explained.     Following  the  turn  of  the  tid 
December.  11.14.  London  exchange  sagged  heavily  through  tne 
summer  ot  liU.I.  wh    i  gold  shipments  to  Xew  York  and  a  loan 
placed  m  Xew  York  brought  it  back  to  about  2  per  cent  below 
par.     This  discount  was  supposed  to  be  not  greater  than  the 
expense  of  shipping  gold  from  London  to  Xew  York  when  war 
time  insurance  rates  and  other  expenses  were  taken  into  account. 
Sterling   exchange    with    the   exception   of   a   slight   break    in 
November,  li.l.;.  has  been  kept  "pegged"  at  this  point.     The 
operations  have  Iwen  largely  conducted  by  J.  P.  Morgan  &  Co 
through  whom  gold  has  l)een  brought  to  the  New  York  market 
and  through  whom  purchases  of  sterling  exchange  have  been 
made  in  enormous  volume.     Through  much  of  l!»l(i  and  down 
to  the  entrance  cf  the  United  States  into  the  war  in  1017.  J.  P. 
Morgan  &  C„.  were  purchasing  in  the  Xew  York  marke'  ster^ 
ling  exchange  tn  an  average  of  $lo.()(M».<)(M»  a  day.     With  the 
entrance  of  the  Inited  States  into  the  war  and  the"  extension  of 
credit  by  the  .Xnicrican  C.overnment  to  the  IJriti.sh  Goverment, 
sterbng  has  been  in  i)art  protected  by  different  measures. 

The  coiirn-  of  the  neutral  exchange  rates  in  Xew  York  has 
been  strikingly  different.  Interruptions  by  the  British  navy  of 
sh.pment>  oi  gold  to  those  neutral  states  so  situated  that  the 
gold  might  go  on  to  Berlin,  notably  Sweden,  led  early,  as  our 
chart  opposite  shows,  to  a  premium  on  neutral  exchange  in 
Xew  York.  The  situation  was  intensified  after  the  entry  of  the 
Lmu.!  States  into  the  war.  and  particularlv  after  the 'Federal 
-■teserye  Board  jiolicy  ..f  restricting  gol.l  shipments  was  put  into 
etiect.'  Kates  on  various  iK)iiits.  \'alparai.so.  Madrid  and  the 
northern  neutrals,  grew  very  adverse. 

aBom      f  ,         I     '^'■''■'•^'    H'-'T'I  o.iuurml       11,,    Beard  actf.l  incrrK  aV  the 
chapter  vv.  ,„fra.  uu  the  Fc.l.ral  Reserve  Hoar.l  '        *^'     ** 


V 


THE   UNITED   STATES 


161 


The  case  of  Spanish  exchange  is  particularly  interesting.  So 
far  as  our  direct  trade  relations  with  Spain  are  concerned,  the 
balance  of  trade  is  favorable  to  us.  We  export  to  Spain  more 
than  we  import  from  her.  But  the  British  and  French  Govern- 
ments were  making  heavy  purchases  in  Spain  for  their  armies 
in  France  and  later  the  American  Government  also  made  such 
purchases  for  its  army— a  procedure  particularly  desirable  inas- 
much as  the  goods  crossing  the  Pyrenees  were  not  exposed  to 
danger  from  the  U-boats.  Spanish  bankers  thus  became  pos- 
sessed of  large  amounts  of  sterling  and  franc  exchange  which 
they  sold  increasingly  in  New  York,  as  they  could  there  find  the 
best  market  for  it.  in  view  of  the  credits  which  were  being  used 
there  to  protect  sterling  and  French  exchange.  As  a  result. 
Spanish  bankers  became  possessed  of  an  ever  increasing  amount 
of  dollar  exchange  in  Madrid,  and  the  price  of  dollar  exchange 
was  correspondingly  depressed.  The  natural  method  of  meeting 
this  difficulty  would  be.  of  course,  to  ship  gold  to  Spain.  This, 
however,  was  not  permitted  by  the  Federal  Reserve  Board  and 
during  the  .summer  of  liUS  he  premium  on  Spanish  exchange 
(pesetas)  exceeded  50  per  cent,  declining  sharply  late  in  the 
summer,  when  the  defeat  of  the  German  armies  in  France  was 
assured. 

.\  similar  tale  mi^ht  be  told  of  South  American  exchange.' 

The  story,  however,  of  the  exchange  rates  on  Madrid  and 
Stockholm  is  nof  complete  In  both  these  countries  a  further 
complication  entered;  namely,  the  suspension  of  the  free  coinage 
of  gold  and  the  cessation  of  the  purchasi  by  tht  Bank  of  Spain 
and  the  Bank  of  Sweden  of  gold  for  bark  notes  at  a  fixed  rate. 
In  l)oth  Sweden  and  Spain,  as  a  consequence  of  this  restriction 
of  free  coinage  of  gold  and  free  issue  of  l)ank  notes,  the  wonrv 
of  the  countries  rose  to  a  value  exceeding  that  of  its  noni  lal  gold 
bullion  equivalent-  Shipment  of  gold  bullion  t..  Spain,  there- 
fore, was  not  Mifficicnt  to  bring  Madrid  exchange  in  \cw  ^'ork 

•  Srr  rircnt.ir  \,,  .W  of  thr  l.atm  Ampric.ii,  DiviMnn  ..f  the  V  S  Riir.-au 
of  for.iKn  .iii.l  n,mu-s;,c  rommrrrr  ..n  •  I  ),.■  Cdil.an  Trade  Rilanrc  .ntui 
horfiRti   IxcbaiiBf.     rrlcaMcl  for  inililicition   Inni-  2\    1018 

riiis  Mas  l,.,M  t.ik,-n  In  <rrl;!in  .vlhrretit^  "f  llir  .|n,,riitv  ihrorv  of  money 

V  \^"'?l  "'  '•"■  'l"a'""^  '^•:'"■^■      The  prcs.„f  wnur  i1or«  not  so  r'-«ard 
It.     bee  the  present  writer  s  /  ,,!»,'  nf  }t,„u-v   cha|»i   7  .mil  22 


1 


|1 

I   ' 

i 

t 


! 


I(i2     11  11  ITS  UK   TllK   WAR  ON    MONEY,   CREDIT   AND   BANKINC 

to  par,  as  shown  l)y  the  fact  that  there  was  a  premium  of  .".  per 
cent  nil  Si)anish  exchange  in  September,  r.Uti,  at  a  time  when 
it  wa->  still  possible  to  sliip  ^old  to  Spain,  it  is  interesting  to 
note,  however,  that  I'rench  gold  coin  lias  currency  riglits  in 
.Spain.  Sjiain  has  never  been  a  full  member  of  the  Latin  Mone- 
tarv  I'liion.  but  by  convention  between  Spain  and  France,  con- 
nected with  the  organization  of  the  Latin  Monetary  L'nion, 
I'reiich  gdld  coin  has  currency  rights  in  Spain.  The  most  ef- 
fective method  of  using  gold  there  to  protect  dollar  exchange  at 
.\Li(lrid  would  be  to  send  gold  bullion  to  France  and  secure  in 
e.xdiange  I'rench  minted  gohl,  which  could  be  taken  to  Spain. 
This  operation  indeed  would  not  recpiire  the  actual  -hipment  of 
gold  to  I'rancc  since  the  I'.an(|ue  de  France  would  in  all  proba- 
bilitv  consent  to  accepting  gold  deposi  ed  in  .\merica  "ear- 
marked "  for  its  use. 

I'.y  various  indirect  measures  (jther  than  shipments  of  gold, 
including  the  efforts  to  negotiate  loans  in  neutral  markets,  the 
authnritics  in  charge  of  our  foreign  exchange  have  endeavored 
to  rectify  the>e  adverse  neutral  rates.  By  October.  r.il"<.  the 
rate>  had  improved  very  markeiily.  The  present  write  ventures 
to  express  the  opinion,  however,  that  the  improvement  in  dollar, 
>iterliiig  ,iiiil  fr.inc  exchange  in  the  neutral  markets  has  been 
cliirtly  line  to  the  efforts  of  (ieneral>  Foch.  Haig  and  IVrshing, 
r.ither  tiian  to  the  fm.incial  measures  of  tho>e  who  have  sought 
to  -nb-titute  indirect  mea.sure--  lor  the  direct  shipment  of  gold. 

An  interesting  epi-ode  in  the  foreign  exchange  relations 
during  the  war  has  bieii  the  ri^-  in  the  price  of  silver  and  the 
n-e  in  the  price  of  exchange  on  the  countries  with  the  silver 
st.i'idard.  notably  (  hina.  Fxchange  rates  on  India,  which  has 
no!  been  suppo-ed  to  be  on  :i  silver  standanl,  but  ratlier  on  the 
^oM  rsiliaiigf  M.uidard.  h.ive  ,ilso  lieen  affected,  since  the  silver 
nip.  f,  redeemable  in  gohl  or  gold  excliange.  lias,  by  virtue  of  its 
silver  content,  become  worth  more  tli.iti  tiie  gold  in  which  it  is 
sujiiHiMil  t<i  lie  redeemed,  and  so  has  become  an  in.lependent 
standard. 

i'lie  .accompanying  cli.irt   reproduced  here   from  the  I'ldrrid 
A',AV).v  Hull,  tin  of  .Vptember   L    I'.'l'',  exhibits  deselopmeiits 


1' 


r:  1 


THE    UNITED   STATES 


163 


in  the  London  price  of  silver  and  the  exchange  rates  on  Shanghai 
Hongkong  and  Bombay.    The  average  pnce  "^ /'Iver  m  Ul.J  n 
London  ((50.458  cents  per  ounce,  Bnt,sh  standard  ().!)2.  fine) 
is  taken  as  100  per  cent,  and  the  movements  in  the  London  pnce 
of  silver,  indicated  in  our  chart,  are  percentage  changes  from 
that  basic  price.     The  explanation  of  the  rise  m  the  pnce  of 

silver  involves  several  factors:  (1)  the  '^^^-:^'^^%^;  ^^^^^ 
production  due  to  unsettled  conditions  in  Mexico;  (2)  increased 
coinage  of  silver  by  certain  of  the  European  Wl.gerents  to 
replace  silver  which  had  ..en  hoarded,  which  has  been  r^^^^^^^^^^ 
we  have  seen,  to  a  considerable  extent  in  France;  (.5  he  faNor 
able  trade  balances  of  the  far  eastern  countries,  notably  CVuna 
and  India,  which  were  settled  in  part  by  unusual  silver  shipments. 
Other  minor  factors  entered.  ,.       t    „;„„ 

The  shipment  of  silver  instead  of  gold  m  settling  foreign 
balances  was  viewed  as  a  .lesirable  circumstance  ^y  the  federal 
reserve  authorities,  and  to  increase  the  silver  available  for  for- 
eign shipment,  an  act  was  passed  by  Congress,  signed  by  the 
President.  .April  23.  1918.  which  authorized  the  retirement  o 
silver  certificates  which  constituted  the  major  part  of  the  small 
paper  money  of  the  United  States,  and  the  melting  down  of  the 
silver  dollars  held  behind  these  certificates.     The  banks  were 
asked  to  send  in  silver  certificates  when  deposited  with  them  and 
a  substantial  volume  of  the  Treasury  silver  was  thus  re  eased.  By 
November  21.  I!n8.  more  than  l.'-.O.OOO.OOO  silver  dollars  had 
been  taken  from  the  Treasury  vaults  an.l  had  been  melted  into 
bullion  for  export  to  India  and  other  countries,  reducing  the 
Treasury    fund    of    silver    securing    silver    certificates    from 
«4<.to.ooo.ooo  to  i>:j:j8.ooo.ooo.' 

To  meet  the  shortage  in  one  and  two  dollar  hills  thus  created, 
the  act  also  provided  that  the  fe.leral  reserve  banks  should  iss« 
federal  reserve  bank  notes  ( not  federal  reserve  notes )  in  denomi- 
nations of  one  and  two  <lollars.  These  federal  reserve  bank  notes 
are  issued  under  the  general  provisions  of  the  oh  National  Bank 
Act.  and  are  secured  by  United  States  bonds  and  other  approved 

•  Frrf.r«;  R,->rr,r  UuU.-lif..  September  1    1918.  paR*  837. 
•New  York  I'trnvt!)  /V.w,  November  -1.  m». 


t,  i 


i  ^    '9 

II 


V 


1C4     EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT  AND  BANKING 

securities.  A  large  volume  of  these  new  federal  reserve  bank 
notes  has  appeared  in  circulation.  The  act  further  provides  that 
the  government  shall  later  repurchase  silver  and  restore  the  silver 
certificates  to  circulation. 

Even  before  the  act  providing  for  the  retirement  of  silver 
dollars  and  silver  certificates,  there  had  been  a  shortage  of  hand 
to  hand  money  in  denominations  of  one  and  two  dollars,  which 
had  been  met  in  part  by  transforming  the  old  greenbacks  (United 
States  notes)  of  larger  denominations  into  one  and  two  dollar 
bills." 


'  I  'idc  E.   K.  Agger :  "  Our  Large  Change,"  Quarterly  Journal  of  Eco- 
nomics. 1917. 


CHAPTER  XV 

The  Federal  Reserve  System  during  the  War 

The  task  undertaken  in  this  study  has  lieen  to  set  forth  the 
effects  of  the  war  upon  money,  credit  and  banking,  rather  than 
to  write  a  comprehensive  history  of  developments  in  money, 
credit  and  banking  during  the  war.  A  large  volume  would  be 
required  to  treat  adequately  the  extraordinary  developments  in 
the  United  States  during  the  war,  in  view  of  the  inauguration  of 
our  federal  reserve  system. 

But  it  has  been  possible  to  trace  the  main  movements  in  money, 
credit  and  banking,  growing  out  of  the  war  down  to  March, 
1917,  when  the  United  States  broke  with  Germany,  with  com- 
paratively little  reference  to  the  federal  reserve  system. 

The  federal  reserve  system  had  not  been  set  going  when  the 
great  war  broke  out  at  the  end  of  July.  litU.     The  Federal 
Reserve  Board  was  not  organized  till  .\ugust  12,  1!>14,  and  the 
federal  reserve  banks  were  not  opened  for  business  till  November 
16,  1!)U.     It  was  the  .Mdrich-Vreeland  notes,  and  the  close 
cooperation  of  existing  banks,  clearing  houses,  stock  exchanges 
and  the  Treasury,  which  met  the  first  shock  of  the  war.     The 
flood  of  gold  which  came  to  us  lieginning  with  December,  1014, 
made,  as  shown  by  our  curve  for  call  rates  in  Kew  York,'  the 
easiest  money  market  in  the  history  .)f  Wall  Street,  and  made  it 
largely  unnecessary,  l)efore  April,  1!>1T,  for  the  banks  generally 
to  have  recourse  to  rediscounting  at  the  federal  reserve  banks.' 
Certain  of  the  country  federal  reserve  banks,  as  those  at  Dallas, 
Kansas  City  and  Atlanta,  1)egan  to  rediscount  substantially  soon 
after  they  began  business,  particularly  as  the  rise  in  agricultural 
prices  and  the  revival  of  agricultural  prosperity  made  increasing 
demands  on  the  loan  funds  of  the  memlier  banks  in  these  districts. 

'  PaRc  154.  .  ^ 

•  Another  factor  was  the  redurtioti  in  legal  reserve  requirements,  under 
the  Federal  Reserve  Act. 

16.5 


u 


li- 


1' 


Utt!     KFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT  AND  BANKING 

Hut  the  federal  reserve  hanks  in  the  great  financial  centers  were 
not  rediscounting  enough  to  enable  them  to  pay  dividends  through 
practically  the  whole  period  prior  to  the  entrance  of  the  United 
States  into  the  war. 

The  existence  of  the  system,  of  course,  lent  confidence  to 
bankers  and  business  men  throughout  the  country  and  the  knowl- 
edge tiiat  it  was  available  if  emergency  should  come  undoubtedly 
hastened  the  industrial  revival.  But  the  great  and  distinguished 
services  of  the  federal  reserve  banks  have  come  since  March, 
I'.tlT. 

One  great  service  for  which  the  federal  reserve  system  has 
been  designed  has  been  of  course  to  constitute  a  reserve  of  lend- 
ing power  for  the  (>ther  I)anks.  The  system  has  been  designed  so 
that  as  other  lianks  readi  the  limit  of  their  own  ability  to  lend 
on  sound  security  tiiey  can  turn  over  to  the  federal  reserve  banks 
parts  of  their  loans  and  discounts  and  receive  from  them  new 
funds  which  they  can  lend.  .\t  the  beginning  of  1!»17,  the  federal 
reserve  banks  had  earning  assets  of  $:i21,syij.000,  including 
rediscounted  paper  ])urchased  from  member  banks,  bills  of  ex- 
cliange  Ijought  in  the  open  market,  various  government  securities. 
State  and  municipal  warrants  and  the  like.  Their  chief  asset, 
however,  was  the  non-earning  asset,  gold.  Foreseeing  war  from 
the  beginning  of  lit  17,  the  federal  reserve  banks  sought  to 
■strengthen  their  position  by  reducing  their  earning  assets,  and 
when  the  war  broke  out  their  earning  assets  amounted  to  only 
$l'i7,!i!»4,O00.  With  decks  cleared  for  action,  they  were  pre- 
pared to  begin  rediscounting  on  an  enormous  scale  as  the  burden 
of  war  finance  should  compel  the  other  banks  to  have  recourse 
to  the  federal  reserve  system.' 

The  growth  in  virtually  all  the  items  of  the  balance  sheet  of 
the  federal  reserve  system  since  the  United  States  entered  the 
war  has  been  very  great  indeed,  and  rellects  services  of  inestim- 
able importance  to  the  country.  Witli  this  growtli  of  resources 
and  liabilities  has  come  ;dso  an  extraordinary  increase  in  earn- 
ings, which  has  wiped  out  all  arrears  in  tlividends  and  placed 


'Federal  Kesene  BulU'tiii,  May  1,  1917.  paKf  335. 


mtm 


11 


THE    UNITEU   STATES 


167 


IP 


the  federal  reserve  system,  as  jocosely  suggested  by  a  distin- 
guished financial  writer,  in  the  class  of  the  "  profiteers." 
The  following  table  '  shows  the  growth  of  the  system : 

PKINCIPAL  RESOURCE  AND  LIABILITY    I  I  EMS  OF  THE 
FEDERAL  RESERVE  SYSTEM  ON  SELECTED  DATES 

(In  thousands  of  dollars) 

Nov   26  Dec.  22  Oct.  25 

1915  1916  1918 

Resources 

Total  gold  reserves »  492,063  •  728.445             •  2,045.132 

Total  cash  reserves »  529.375  »  734,470             '2,098,169 

Bills  discounted : 

Secured  by  government  war  ob- 
ligations      1,092,417 

.Ml  other  32,794  32,297                  453.747 

Bills  be  Jght  in  open  market 16,179  124,633                  398,623 

U.    S.    Government    long    term    se- 
curities          U919  43.504                    28,251 

U.    S.    Government    short    term    se- 
curities    n.l67                  322,060 

Total  earning  assets 89,200  222,158               2,295.122 

Total  resources  637.261  1.009,852  » 5^70,785 

Liabilities 

Capital  paid  in  and  surplus 54.846              55,765                   80,324 

Government  deposits  15,000              29,472                   78.218 

Member  banks'  reserve  deposits.....  '397.952          =648.787               1.683,499 
Other     deposits,     including     foreign 

government  credits   *  117,001 

Federal  reserve  notes  in  actual  cir- 
culation      165,304            275,046              2.507.912 

» Includes  amounts  of  gold  and  other  lawful  money  deposited  with  federal 
reserve  agents  again't  federal  reserve  notes  issued. 

•>  Includes  clearing  house  exchanges  and  other  uncollected  items  formerly 
deducted  from  member  bank  deposits. 

'■  Net  amount  due  to  member  banks. 

••  Exclusive  of  deferred  credits  on  account  of  uncollected  checks  and  other 
cash  items. 

One  very  important  item  in  the  expansion  of  the  resources 
and  liabilities  of  the  federal  reserve  banks  since  the  United  States 
entered  the  war,  and  an  item  which  represents  a  great  growth  in 

'  I  am  indebted  to  Dr.  M.  Jacobson,  statistician  of  the  Federal  Reserve 
Board,  for  this  table.  Chanecs  in  accounting  methods  since  the  inaugura- 
tion of  the  system,  partly  due  to  changes  in  the  law,  make  it  difficult  to 
compare  off  hand  the  earlier  and  later  st.Ttrments. 


MICROCOPY    UISOIUTION   TEST   CHART 

ANSI  and  ISO  TEST  CHART  No    ? 


1.0 


I.I 


•-  IB 

1  m 

:  1^ 


IIM 

|Z2 
2.0 

1.8 


11-25  IIIIII.4    il.6 


^     APPLIED  INA^GE     Inc 

mT  '    I  .111    Mq."    ■■,!'«•• 


16S     El  FFCTS  OF  THE  WAR  OX    MOXEY,   CREDIT   AXD  BANKING 

Strength  for  the  system,  is  to  be  found  in  the  increase  in  gold 
on  tlie  assets  side,  matched  by  tlie  growth  of  federal  reserve  notes 
and  memljer  l)ank  deposits  on  tiie  liability  side.  The  total  stock 
t)f  gold  coin  (including  bullion  in  the  Treasury)  in  the  United 
States  on  April  1,  I'.tlT,  was  estimated  at  $;5,0>s.s.',,o:i,0()(>,  a 
figure  wiiich  lias  not  been  substantially  altered  since,  as  both  ex- 
ports and  iinports  of  gold  have  since  been  comparatively  slight. 
Of  tliis,  the  Inited  States  Treasury  held  $i'();},s(j,s,000,  the 
federal  reserve  system  held  $!l.'5S.04t),OO(),  and  gold  "  in  circula- 
tion." supposed  to  be  largely  lield  by  i)anks,  was  placed  at 
$l.'.i4f.,!llil, (>(»().'  Between  April  1,  IIMT,  and  April  1.  litlS. 
roughly  a  billion  dollars  of  the  gold  held  by  other  banks  and  in 
general  circulation  was  turned  over  to  the  federal  reserve  banks. 
rai>ing  their  gold  holdings  from  .$li:!S.(i4t'.,(»(io  to  $l,M;5,!>2l,(t()(>. 
By  September  20,  litis,  the  total  gold  holdings  of  the  federal 
reserve  banks  had  risen  to  .$2,<):.'."i,.").">s.(M)0.  Over  two-thirds, 
therefore,  of  the  free  gold  of  the  country  is  now  concentrated 
in  the  hands  of  the  federal  reserve  banks.  The  policy  of  accumu- 
lating gold  is  expected  to  continue,  and  a  member  of  the  Federal 
Reserve  Boanl  recently  expressed  the  opinion  that  the  gold  hold- 
ings of  tlie  system  might  Iw  expected  to  reach  $2..".(M».()(»(t.(M)0 
before  the  end  (  f  the  process  is  reached. - 

It  is  i)robable  that  the  estimate  for  the  total  stock  of  gold  in 
the  country  is  too  high.  It  is  doubtful  if  there  remained  on 
April  1,  l'.tl>,  ap|)roximately  a  ))illion  dollars  of  gold  in  circula- 
tion or  in  the  hands  of  other  banks.  It  is  probable  that  the 
estimates  for  the  gold  held  in  the  country  before  the  war  have 
been  too  high,  that  there  hu>  t)een  an  un<l<restimate  of  the  annual 
consnm])tion  of  golil  in  llie  arts  and  that  the  original  figure  with 
which  the  Director  of  the  Mint  started  his  computation  was  too 
high.  (.  omiteteiii  students  have  suggested  to  the  j)resent  writer 
that  the  overe-tiniate  in  the  total  stock  of  gold  may  be  as  great 

'  Mutli  oi  this  was  in  nolil  itrliticalts,  "  )tllii«liaiks,"  of  l:irge  ditiomiiM- 
fidtis.  111  III  li\  till'  '.inks  as  ,i  cniiMiiuiil  nuaiis  nf  intirliaiik  scttlfnu'iits.  nr 
ill  siuiJUr  ill  nomiiiatiniis  fnr  KiMiral  i  iniilatinn.  Tilt  actual  ^iM  was  tii 
a  larKi'  ixttiit   in  tlii'  L'liitnl  Slates  'Ircasurj 

'Inillur  11.11,1  tiiratiiiii  i.f  khI.I  wII  In-  (Kililatii!  Iiy  tlir  pnipnscij  is»uc 
of  friliral  irsirvi  imlis  in  larvr  ili  nominatiuiis,  wliiili  will  make  it  i-asiir 
for  mitnlicr  lianks  to  <li-|iiiisf  witli  tlitir  largi  lUiiiiiniii.ilioii  khM  ctrtitk.iti's. 


THE    UNITED    STATES 


169 


as  from  two  to  five  hundred  million,  though  these  figures  are 
largely  guess  work.  If  this  view  be  true,  however,  then  the 
proportion  of  gold  held  by  the  federal  reserve  banks  is  substan- 
tially greater  than  two-thirds  of  the  total  stock.  It  represents 
an  accumulation  which  should  make  us  impregnable  against  any 
foreign  drain  on  our  gold,  and  which,  barring  a  panic  introduced 
by  an  injudicious  policy  on  the  part  of  the  federal  reserve  banks 
themselves,  should  forever  banish  doubt  as  to  the  ability  of  the 
banks  of  the  United  States  to  pay  all  gold  obligations  on 
demand. 

This  policy  of  collecting  gold  was  greatly  facilitated  by  the 
amendments  to  the  Federal  Reserve  Act  in  the  summer  of  1917, 
which  reduced  the  reserve  percentages  required  of  member  banks 
and  which  allowed  them  to  count  as  their  legal  reserve  only 
deposits  with  the  federal  reserve  banks,  so  that  gold  or  lawful 
money  held  in  their  own  vaults  no  longer  counted  as  legal  reserve. 
This  made  it  possible  for  the  member  banks  to  turn  over  all  their 
gold  to  the  federal  reserve  banks,  receiving  in  return  either 
deposit  credits  or  federal  reserve  notes,  depending  upon  their 
own  preference  and  their  customers'  needs.' 

It  may  be  observed  in  passing  that  this  fundamental  change 
in  the  law  relating  to  cash  reserve  was  accepted  almost  without 
question,  whereas  the  more  moderate  proposal  to  make  federal 
reserve  notes  available  as  legal  reserve  for  member  banks  had  led 
to  a  violent  outcry  by  those  who  feared  "  inflation  "  only  a  short 
time  before.  Practically,  there  is  little  difference  between  the  two 
proposals.  It  is,  if  anything,  easier  to  get  a  deposit  credit  with  a 
federal  reserve  bank  than  to  get  new  federal  reserve  notes  from  a 
federal  reserve  bank.  Federal  reserve  notes,  and  deposits  with 
the  federal  reserve  banks  are  in  economic  nature  virtually 
identical.  In  the  i)resent  writer's  view,  it  i:.  perfectly  legitimate 
that  either  should  be  used  as  reserve  by  member  banks.  In  the 
present  writer's  view,  the  whole  system  of  legal  reserve  require- 
ments is  ridiculous  in  any  case.  In  the  provision  that  deposits 
with  the  federal  reserve  hank  constitute  tlie  only  legal  reserves  of 

'  Aiuiflier  anietultnciit  in  l"'t7  'simplified  the  prorcs*  of  fxchantting  Rold 
for  federal  re«prve  note*  and  made  it  pusKiblc  to  count  the  gold  in  the 
•y»tem  as  re-iervf  fi.r  either  notes  or  deposit*.  interch.iriReably. 


IM 


6  ' 

III 


*  I 


i   I 


il: 


! 


if 


i\ 


1'  M 

n  1 


170     KIFECTS  OF  THE   WAR  ON    MONEY,   CREDIT   AND  BANKING 

member  banks,  we  l-.avc  an  achievement  in  the  direction  of  sound 
banking  of  tlie  tir.st  magnitude — we  have  virtually  an  abandon- 
ment of  the  legal  reserve  requirements,  since  it  is  almost  always 
possible  for  member  banks  to  get  additional  "  legal  reserve  "  by 
rediscounting  paper.  Their  real  reserves  become,  therefore,  their 
portfolios  rather  than  their  cash  on  hand,  bringing  them  into  line 
w  ith  the  policy  which  European  bankers  had  long  since  taken  for 
granted. 

L'nnoticed  by  the  great  mass  of  the  people,  the  federal  reserve 
banks  have  introduced  a  smoothness  and  simplicity  in  handling 
huge  financial  transactions  that  would  have  been  incredible  under 
the  old  >ystem.  In  the  summer  of  11H8.  the  federal  government 
collected  around  $4,(»t>t».()()().0()0  in  taxes  in  a  few  weeks.  In 
connection  with  the  First  Liberty  Loan.  .$:.'.()()(».(H)i).<)()()  were 
paid  into  the  federal  Treasury  in  a  short  time.  With  each  of  the 
succeeding  liberty  loans,  larger  amounts  have  been  handled  in 
short  periods,  funds  collected  from  all  over  the  United  States, 
transferred  to  the  credit  of  the  government  and  disbursed 
largely  in  other  parts  of  the  country  from  those  which  originally 
contributed  them.  I-'inancial  transactions  of  this  magnitude 
would  have  led  under  the  old  system  to  drains  falling  particu- 
larly on  the  \e\v  York  banks,  which  would  have  forced  them 
instantly  to  suspend  cash  payments.  Had  the  subtreasury  system 
remained  in  full  vigor,  under  which  all  payments  to  the  federal 
government  were  taken  from  the  banks  and  placed  iMxlily  in  the 
vaults  of  the  government  itself,  the  mechanism  would  have 
broken  down  with  the  First  Lil)erty  Loan.  Under  the  federal 
reserve  system,  however,  these  huge  financial  transactions  have 
been  largely  accomplished  by  bookkeeping  entries.  Various  offi- 
cers (if  tlie  federal  reserve  batiks,  and  very  specially  the  central 
otticc  nf  the  I'ederal  Keserve  Hoard  at  Washington,  have  devel- 
o|ied  a  marvelous  //»(•.«(•  in  balancing  debits  and  credits.  This 
has  involved  a  study  in  advance  of  the  probable  demands  to  be 
made  on  banks  in  various  localities,  the  effort  to  route  collection 
items  through  them  in  such  a  way  as  to  give  them  funds  which 
woulil  break  the  shock  of  tlie  heavy  withdrawals,  jmividing  in 
advance  to  rediscount  paper  for  them,  and  suggesting  to  the 


THE    UNITED    STATES 


171 


Treasury  the  best  places  wucre  government  deposits  might  be 
made  to  offset  heavy  drafts.  It  has  also  involved  the  policy  of 
rediscounting  on  the  part  of  one  federal  reserve  bank  for  another 
in  such  a  way  as  to  keep  their  gold  reserve  ratios  approximately 

equal. 

The  Treasury  policy  of  preceding  the  great  loans  and  lieavy 
tax  paynu-nts  by  the  marketing  of  short  term  Treasury  certifi- 
cates, maturing  on  the  dates  when  tax  payments  or  payments  on 
the  liberty  loans  were  due.  and  receivable  by  the  Treasury  for 
such  payments,  has  in  itself  been  a  factor  of  first  magnitude  in 
reducing  financial  friction.  But  under  the  old  system,  these 
Treasury  certificates  themselves  would  have  strained  the 
machinery  severely. 

Shordy  after  the  inauguration  of  the  federal  reserve  system, 
the  Federal  Reserve  Board  required  the  federal  reserve  banks  to 
create  a  gold  settlement  fund  in  Washington,  on  the  analogy  of 
the  gold  fund  on  deposit  in  the  New  York  clearing  house,  de- 
signed to  lessen  the  necessity  of  the  physical  transfers  of  gold 
from  one  federal  reserve  bank  to  another  in  connection  with 
interregional  settlements  .  This  gold  fund,  originally  $12,000,- 
000.  $1,000,000  from  each  l)ank,  has  subsequently  been  added  to 
very  greatly. 

On  July  1,  litis,  daily  settlements  between  the  federal  reserve 
banks  were  inaugurated,  reducing,  in  general,  the  amount  of 
gold  that  has  to  be  transferred  from  one  to  another  at  any  given 
date,  and  making  it  possible  for  the  Federal  Reserve  Board  at 
Washington  to  keep  in  constant  touch  with  the  reserve  situation 
of  each  bank  and  to  keep  reserve  percentages  equalized  by 
constant  rediscounting.  Daily  settlements  do  not  necessarily 
mean  daily  shipments  of  gold  to  and  from  Washington.  "  Sus- 
pense accounts  "  kept  l)y  the  various  federal  reserve  banks  with 
the  gold  settlement  fund,  obviate  this. 

It  would  be  hard  to  give  too  much  praise  to  the  efficiency  and 
initiative  of  the  men  who  have  worked  out  this  wonderful  system 
of  substituting  book  traiVsfcrs  for  the  large  cash  shiiHuents 
which  the  old  system,  despite  its  great  economies,  involved.  War 
finance  on  our  presetit  scale  could  hardly  have  been  carried  on 


li 


i 


li-Z     EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND   BANKING 


V 


by   the   old  machinery.      It   is   a   supreme   vindication   of   the 
federal  reserve  system. 

Another  important  part  of  the  work  of  the  federal  reserve' 
system  has  been  in  the  control  of  credits,  both  in  reducing 
credits  to  non-essential  industries,  and  in  securing  credits  for 
essential  industries.  This  has  taken  place  largely  in  an  informal 
way  through  advice  and  suggestions  to  member  banks.  Thus  in 
the  summer  of  1!>1T,  the  I'ederal  Reserve  Board  sent  out  a  letter 
saying  that  cattle  .  ders,  paying  high  rates  of  interest,  were 
finding  their  interest  charges  running  from  3.1  to  40  per 
cent  of  their  total  expenses,  and  urging  the  member  banks  to 
extend  them  credits  more  liberally  and  at  lower  rates.  At 
various  times  and  with  increasing  vigor  and  definiteness,  the 
Federal  Reserve  i^oard  has  urged  upon  the  member  banks  the 
policy  of  restricting  credits  to  non-essential  industries.  V^arious 
federal  reserve  banks  have  gone  far  in  explicit  advice  and  guid- 
ance of  member  banks  in  this  matter.  In  a  more  authoritative 
way  the  (."apital  Issues  C'onmnttee  of  the  Federal  Reserve  Board 
has  sought  to  limit  the  issues  of  new  securities  by  non-essential 
industries,  turning  over  this  work  recently  to  the  newly  formed 
War  Finance  Corporation. 

In  one  respect  the  Federal  Reserve  Board  and  the  federal 
reserve  banks  have  failed  to  use  a  powerful  means  of  restricting 
non-essential  credits.  They  have  kept  their  rediscount  rates  low, 
lower  than  the  facts  of  the  money  market  warranted,  and  lower 
than  has  been  consistent  with  a  vigorous  control  over  the  credit 
situation.  In  this,  as  will  appear  later,  they  have  probably  not 
had  a  free  hand,  but  have  submitted  their  policy  to  the  policy  of 
the  Treasury. 

.Another  important  policy  in  which  the  Federal  Reserve  BoanI 
has  been  nominally  resixiusible,  has  been  in  the  control  over  for- 
eign gold  shi])ments.  and  in  the  regulation  of  foreign  exchange 
rates.'  The  policy  has  been  one  of  restricting  gold  shipments, 
viriualiy    i)niliil)iting   them,    with    few    and    minor   exceptions. 

'  I'lu'  I'ldiT.il  Kt'sjrvi'  Hd.uiI  1ki'<  rvally  biiii  acting  as  the  agent  of  the 
Sun  t.irv  iif  the  Tri;i^ury  in  thi'-  m.ittir.  Tlarc  is  no  evidence  that  the 
liii.iril  aplirtivnl  the  policy  at  the  tiiiie  of  its   ineeptioii. 


THE   UNITED   STATES 


173 


Those  who  have  carried  out  the  detailed  application  of  the  gold 
policy  have  been  loath  to  discuss  the  matter  in  detail,  and  have 
been  unwilling  that  much  should  be  said  in  public  discussion  of 
it,  fearing  that  their  international  operations,  involving  delicate 
negotiations  with  foreign  banks  and  even  with  foreign  govern- 
ments, might  be  interfered  with  by  discussion  of  their  plans  and 
purposes.  It  is  not  easy,  therefore,  to  state  with  justice  or  with 
vigor  the  theory  which  has  animated  them.  The  policy  has 
involved  not  merely  the  restriction  of  gold  shipments  to  foreign 
countries,  but  it  has  also  involved  a  restriction  of  gold  payments 
within  the  cnuntry,'  and  a  limitation  upon  the  gold  available  for 
manufacturing  jewelers,  dentists  and  others.  The  present  writer 
finds  it  impossible  to  sympathize  with  this  policy  or  to  defend  it. 

The  essential  elements  involved  in  the  gold  standard  are: 
(a)  the  free  interconvertibility  of  bullion  into  coin,  (b)  the 
free  interconvertibility  of  coin  into  bullion  and  (c)  the  instant 
redemption  on  demand  of  paper  and  other  subsidiary  money  in 
gold  coin.  Whatever  may  be  said  of  the  policy  of  restricting 
gold  shipments  abroad,  it  is  difficult  to  make  a  case  for  the  failure 
to  preserve  the  gold  standard  in  its  full  integrity  at  home.  The 
voluntary  surrender  by  banks  and  people  of  gold  to  the  central 
gold  reserves  is  desirable,  and  the  effort  of  the  Federal  Reserve 
Board  to  accomplish  this — following  the  policy  of  the  Reichs- 
bank  and  of  the  Banque  de  France — is  praiseworthy.  But  the 
whole  point  involved  in  such  a  policy  is  to  increase  the  certainty 
that  the  federal  reserve  system  can  meet  its  gold  obligations  on 
demand. 

There  is  no  sure  basis  for  the  value  of  paper  money  except 
instant  redemption  in  standard  money  on  demand.  It  is  true  that 
other  factors  - — the  loyalty  of  the  people  and  of  the  banks,  the 
confidence  of  the  people  in  the  credit  and  success  of  the  govern- 
ment, the  mere  existence  of  a  huge  gold  reserve  with  the  knowl- 
edge that  the  power  to  redeem  exists — may  sustain  the  value  of 
the  paper  at  par.     Value  is  after  all  psychological.     It  appears 


fii 


I 

i 

h 


'  This  feature  of  tlio  policy  is  informal,  and  has  involved  the  cooper.ition 
of  many  aRoncies.  including  virtuallv  all  the  banks  of  the  country. 
'  I'ltl'c  the  writer's  I'aluf  of  .\foncy.  chap.  7. 


i;   I 


ill! 

HI. 


174     EFFECTS  OF  TllK   WAR  ON    MONEY,   CREOIT   AND  BANKING 

that  paper  inoiiey  in  the  United  States  has  l)een  so  far  maintained 
at  par  in  most  places  during  the  past  year,  but  such  a  basis  for  the 
value  of  paper  nKJiiey  is  insecure.  Overnight  changes  in  the 
attitude  of  the  people  or  banks  might  upset  it;  a  dramatic  event, 
calling  attention  in  a  conspicuous  way  to  the  fact  of  inconverti- 
bility, might  upset  it,  leading  to  just  such  a  depreciation  as  was 
witnessed  in  federal  demand  notes  or  in  the  State  bank  notes 
of  the  Xorth,  following  January  1,  1H(;2. 

Assuming  that  the  value  of  our  paper  money  at  home  is  not 
affected  by  such  a  policy,  there  can  be  no  question  at  all  that  our 
credit  ai)road  is  affected.  The  foreign  exchange  rates  alone 
sliould  make  that  clear.  But  further,  and  looking  to  the  future, 
had  the  United  States  maintained  the  record  of  paying  gold  to 
all  legitimate  creditors  without  question  throughout  the  war, 
had  New  York  remained  the  one  free  gold  market  in  the  world, 
New  York  would  have  needed  in  the  future  to  carry  much  less 
gold  in  reserve  than  she  will  need  for  years  to  come.  The  institu- 
tion or  the  community  that  maintains  the  reputation  of  honoring 
its  obligations  at  all  times  is  rarely  called  upon  to  honor  them 
unnecessarily.  London,  with  vastly  less  in  the  way  of  gold 
resources  than  the  United  States  have  had,  preserves  her  reputa- 
tion in  this  matter  far  better  than  we.  Having  gold,  she  paid  it 
out.  London  has  probably  a  small  amount  of  gold  at  the 
present  time.  The  Bank  of  luigland's  gold  reserves,  as  shown 
in  published  iigures,  are  larger  than  before  the  war,  but  to  a 
very  considerable  extent  the  actual  reserves  are  probably  to  be 
found  in  South  Africa  or  in  Canada  in  depositories  established 
by  the  Bank  of  England.  But  by  the  courageous  use  of  such 
gold  as  she  has  had,  London  has  preserved  her  credit  to  an 
astonishing  degree. 

A  little  more  than  two  decades  ago,  President  Cleveland  faced 
a  situation  in  which  his  gold  reserves — little  more  than 
,$:.>) i.uoo.OOO — promised  to  be  exhausted  in  forty-eight  hours.  He 
continued,  however,  the  policy  of  paying  out  gold  on  demand, 
and  by  his  courage  saveil  the  gold  standard.  New  gold  was 
secured  within  the  forty-eight  hours,  the  reserves  were  replen- 
ished, and  the  country  was  saved  from  another  period  of  demor- 


THE    UNITED   STATES 


175 


alization  growing  out  of  fluctuating  irredeemable  paper  money 
or  the  adoption  of  the  silver  standard.  It  is  not  a  picture  to 
inspire  enthusiasm  when  one  sees  our  federal  reserve  system, 
entrenched  safely  behind  over  $2,000,000,000  of  gold,  showing 
less  of  courage  than  President  Cleveland  manifested  with  his 
scant  $20,000,000. 

Surely  the  history  of  money  has  made  sufficiently  clear 
the  dangers  and  evils  of  irredeemable  paper,  the  fundamental 
disorganization  and  demoralization  that  such  paper  can  occasion, 
to  make  argument  with  reference  to  the  essential  importance  of 
the  preservation  of  the  gold  standard  unnecessary. 

On  the  part  of  some  of  the  defenders  of  the  policy  of  restrict- 
ing gold  payments  within  the  country  and  of  restricting  gold 
shipments  abroad,  there  appears  to  be  a  wholly  irrational  fear 
that  the  end  of  the  war  will  bring  so  great  a  drain  upon  the  gold 
resources  of  the  country,  as  foreign  countries  call  upon  us  for 
gold,  that  we  can  not  meet  it  unless  we  now  hoard  our  gold. 
This  fear  seems  baseless.  The  outside  world  will  owe  hundreds 
of  millions  a  year  in  interest  and  dividend  payments  alone  to  the 
United  States.  The  probability  is  rather  that  we  will  be  left 
with  more  gold  on  hand  than  it  is  economical  for  us  to  keep.  In 
any  case,  the  main  reason  for  having  gold  either  now  or  after 
the  war  is  to  be  in  a  position  to  meet  the  demands  of  those  who 
have  the  legal  right  to  obtain  gold  from  us. 

The  argument  has  been  presented  that  by  retaining  $;$.000.- 
000.000  of  gold  we  will  be  placed  in  a  position  of  such  great 
strength  that  we  can  finance  the  world,  displacing  London  as  the 
international  center.  K  is  not  improbable  that  London  bankers 
who  have  seen  tliis  statement  have  smiled  quietly.  They  do  not 
need  $15,000,000,01)0  to  finance  the  trade  of  the  world!  Before 
the  war.  Great  Britain  financed  the  trade  of  the  world  with 
half  a  billion  dollars  in  gold  and  with  much  less  than  that  in  the 
actual  reserves  of  her  banks.  The  banker  who  can  do  business 
with  a  half  billion  in  gold  can  undercut  in  the  competition  of  the 
world's  money  market  the  banker  who  requires  three  billions. 
An  excess  of  gold  is  a  dead  asset,  a  burden  rather  than  an  aid 
in  competition   in   international   finance.     America  has  great 


u 


1 

y 

■ 

I 

1 

5 

\ 

■  \[ 


17C     EFFECTS  OF  THE  WAR  ON    MONEY.   CREDIT   AND   HANKING 


1' 


financial  strength,  luit  is  surely  siiDwing  a  lack  of  financial 
finesse  and  courage,  so  far  as  the  gold  policy  is  concerned.' 

In  connection  with  these  strictures  on  what  we  have  called 
"  the  Federal  Reserve  Board's  gold  policy,"  it  is  just  to  repeat 
that  the  policy  appears  to  be  that  of  the  Treasury  rather  than 
that  of  the  board — that  the  board  appears  to  have  surrendered 
its  monetary  policy  to  the  fiscal  policy  of  the  Treasury.^  The 
central  purpose  of  the  Treasury  in  this  connection  appears  to  be 
to  float  liberty  bonds  at  a  low  rate  of  interest.  For  this  purpose 
an  easy  money  market  is  regarded  as  necessary.  The  Treasury 
policy  reacts  on  the  policy  of  the  Federal  Reserve  Board  at  two 
vital  points :  (  1 )  Rediscount  rates  must  be  kept  low.  thus  making 
the  control  of  credits  to  non-essential  industries  harder.  (2) 
Gold  must  not  be  allowed  to  get  away  lest  money  rates  be  forced 
up  to  stop  the  outflow  of  gold. 

X'iewed  as  a  policy  of  protecting  the  credit  of  the  United  States 
Government,  this  course  seems  grotesque.  Surely,  the  money  of 
the  United  States  is  more  sacred  than  the  liberty  bonds!  Surely 
it  is  more  important  to  maintain  the  demand  obligations  at  par 
than  to  protect  the  current  price  of  the  time  obligations!  Surely, 
the  credit  of  the  government  is  more  dependent  on  the  punctual 
fulfilment  of  its  contract  obligations  than  on  the  day  by  day 
standing  of  its  long  time  securities  in  the  market! 

Viewed  as  a  tneasure  for  saving  money  for  the  government  it 
is  exceedingly  questionable.  The  saving  of  Y>  per  cent  or 
more  in  interest  can  be  much  more  than  offset  by  two  vital 
factors:  (1)  If  through  the  easy  money  market,  non-essential 
industries  can  get  credits  which  they  would  not  get  if  discount 
rates  were  higher,  then  their  competition  for  labor  and  supplies 
will  raise  the  prices  which  the  government  must  pay  for  the 
things  it  buys,  increasing  the  amounts  which  the  government 
must  Iwrrow.     (2)   More  fundamental,  if  as  a  consequence  of 

'  I'Vir  .1  variety  of  opinions  on  this  Reneral  problem,  see  Hearings  before 
the  Senate  Coinmillee  on  Ifankini;  and  Currency,  on  the  proposed  "  Federal 
Reserve  I'oreiKii  liank,"  summer  of  1918;  and  also  an  address  by  Mr.  F.  I. 
Kent,  reproduced  in  Coni^ressinnal  Record,  .May  1,  1918,  pa^es  6358-6,%.1. 

'  So  f,ir  as  t!ie  foreign  exch.inRc  policy  is  concerncil  tbe  Federal  Reserve 
Hoard  is  really  merely  the  ajtent  of  the  Treasuiy,  exercisinR  delegated 
authority. 


THE    UNITED    STATES 


177 


,  I 


the  failure  to  redeem  the  money  of  the  government  in  gold,  the 
paper  money  itself  should  depreciate,  that  again  would  lead  to 
higher  prices,  to  larger  expenses  for  the  government,  to  say 
nothing  of  great  demoralization  in  the  whole  business  and  finan- 
cial fabric. 

Finally,  it  is  probable  that  liberty  bonds  will  be  sold  at  what- 
ever rate  of  interest  the  governmenl;  proposes  in  any  case.  By 
and  large,  the  .American  people  are  not  taking  liberty  Imnds  as 
investments;  they  are  taking  them  through  loyalty  as  a  means 
of  winning  the  war.  The  difi'erence  of  a  fraction  of  1  per  cent 
or  even  of  1  per  cent,  in  the  interest  rate  would  probably  make 
slight  difference  in  the  amount  of  liberty  bonds  sold,  and  the 
loyalty  of  the  people  and  of  the  banks  is  less  strained  if  they  are 
asked  to  take  liberty  bonds  at  an  interest  rate  below  the  prevail- 
ing market  rates  for  capital  than  when  they  are  expected  to 
protect  the  value  of  the  paper  money  of  the  United  States  in  the 
absence  of  gold  redemption. 

Following  the  amendments  to  the  Federal  Reserve  Act  in  the 
summer  of  11)17,  which  removed  certain  of  the  objections  which 
State  banks  and  trust  companies  had  had  to  entering  the  system, 
the  President  of  the  United  States  issued  an  appeal  on  October 
i;].  1017,  to  the  State  banks  and  trust  companies  to  enter  the 
system  as  a  war  time  measure,  that  they  might  contribute  their 
strength  to  the  system  and  that  they  might  secure  for  themselves 
and  their  patrons  the  protection  which  the  system  afforded.  The 
response  has  been  distinctly  gratifying.  The  great  State  banks 
and  trust  companies  of  New  York  City  entered  ra{  idly  and 
readily.  Bv  June  1,  1018.  480  State  institutions  with  com- 
bined capital  and  surplus  of  .$<i21, 000,000  and  with  total  re- 
sources of  approximately  $0,000,000,000,  had  entered  the 
system.'  The  great  majority  of  State  institutions  still  remain 
outside,  but  many  of  the  largest  institutions,  whose  addition  to 
the  system  would  add  most  to  its  strength,  have  joined. 

There  have  been  various  minor  developments  of  the  federal 
reserve  system,  important  in  themselves,  but  not  so  immediately 
connected  with  war  policy,  of  which  only  brief  mention  can  be 

'  Federal  Reserve  Bulletin,  June,  1918,  page  509. 


!   ( 


178     EFFECTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND   BANKING 

made.  The  various  federal  reserve  banks  have  established 
branches  and  agencies  at  home  and  abroad.  The  Banciue  de 
France  antl  the  Bank  of  I'.nj^land  have  become  aj^^-ncies  of  the 
federal  reserve  bank  of  New  York.  The  Philippine  National 
liank  has  l)ecome  the  agency  for  the  federal  reserve  bank  of  S...1 
I'rancisco;  the  San  Francisco  federal  reserve  bank  has  established 
branches  at  Seattle,  Spokane.  I'urtland  and  Washington;  the 
St.  Louis  federal  reserve  bank  has  established  an  agency  at 
Memphis,  primarily  for  the  purpose  of  keeping  cotton  warehouse 
certificates,  used  as  collateral,  wliere  they  could  be  quickly  got 
at  by  the  borrowers.' 

The  federal  reserve  system  has  inaugurated  a  check  collection 
system.  It  has  put  through  a  campaign  for  acceptances  which 
has  led  to  substantial  modifications  in  banking  practices  in  the 
United  States.  The  Federal  Reserve  Tioard,  in  connection  with 
its  admirable  Federal  Reserve  Bulletin,  has  undertaken  far 
reaching  statistical  ])lans  which  involve  the  development  -)f 
scientific  statistics  which  will  be  of  use  in  business  forecasting. 

But  it  is  outside  the  scope  o.'  our  program  to  write  a  history 
of  the  federal  reserve  system.  We  are  concerned  with  an  outline 
sketch  of  the  effects  of  the  war  upon  it,  and  of  its  role  in  meeting 
the  problems  of  the  war. 

'  Federal  Reserve  Bulletin,  March  1,  1917,  page  168. 


i   ^1 


I    ! 


CHAPTER  XVI 

Public  Finance  and  Bank  Credit 

The  entrance  of  the  United  States  into  the  wai  '  niijrht  at 
once  a  very  great  increase  in  expenditures  by  the  federal  gu\crii- 
ment,  particularly  when  advances  to  the  Allies  are  included.  The 
following  table  '  prepared  by  Professor  Bogart  gives  the  expendi- 
tures of  the  United  States  through  the  months  of  I'Jl",  exclud- 
ing advances  to  Allies.  The  first  three  months,  when  expendi- 
tures were  on  a  peace  footing,  are  also  given  by  way  of  conf  ast. 
The  entrance  of  the  United  States  into  the  war  was  on  April  6, 

1917: 

Monthly  Daily 

January    $79,910,714  $2,577,765 

February    75,844,498  2,708,406 

March    72,773,903  2,347,545 

April   81,599,598  2,719,986 

May  114,102.810  3,680,736 

June    134„W,040  4,776,801 

July   208,299,031  6,719,323 

August    277,438,000  8,949,613 

September    349,013,305  11,337,768 

October    465,045,360  14.904,f  u 

November   512,952,035  17,098,4v-l 

December    611,297.425  19,719,272 

Tot.nl  $2,982,580,719 

Professor  Bogart  gives  also  a  table  covering  three  fiscal  years 
showing  the  objects  of  expenditures,  as  follows : 

Purpose                            1915-16                   1916-17  "1917-18 

Civil  establishment   $380,91 1.,373            $42S,.S65.747  $1,995,886,359 

Military  establishment  1,U18S.275              4n9.789..S21  8.964.44.M85 

Naval  establishment   15?,n29.426              257.166.4.37  1,609.178.0.36 

Rivers   and   harbors .32.4.S0..301                .10.487,560  ,38,295.750 

Panama  Canal    17.503,728                1.3.112.1.30  2.3.739.099 

Pnblic  debt    22.910.313                24.742.129  93,454.000 

Mi.wIlaneous    1.016..310  .34.028.110  .344,120 

Total    $742,006,726         $1,194,891,434         $12.725..340.849 

Purchase    of    obligations    of    foreign    Kovern- 
ments  885.000.000  •>  ,1,351,400,000 

Total    $2,079,891,434         $16,076,740,849 

•  .^Ppropriations.  *  .Actual  for  period  July  1-December  31,  1917. 

'  E.  L.  Bogart :  Direct  Costs  of  ilw  Present  War,  page  2. 

179 


S 

k 
■  I 

i! 


ft 


Hi' 


-U 


l{ 


V 


ISO     EFFECTS  OF   THE  WAR  ON    MONEY.   CREDIT   AND  BANKING 

riie  rapid  developments  in  the  plans  of  the  American  Govern- 
ment, coupled  with  tlie  unexpected  intensity  and  magnitude  of 
American  participation  in  the  war  in  the  summer  of  1918,  has 
led  to  a  substantial  growth  in  the  expenditures  of  the  government, 
and  the  total  appropriations  authorized  for  the  fiscal  year  I'JlS- 
I'.tl'J  run  far  above  $:!0,UUO,000.000.  The  loans  made  by  the 
L'nitetl  States  Government  to  its  allies  down  to  September  20, 
l'.»l>,  total  $7,-'0(!,47(i.(»G(>,  distributed  as  follows: 

Great   lir.tain   $3,745,000,000 

KraiR-e                      2,O()5,OUO,O0O 

Italv                          800,'M),000 

Russia'  ".'.'.'.'.'. 325,000.000 

Belgium    157,020,000 

Griicc            15,790,000 

C-iba                    15,000.000 

Siberia    12,000,000 

Liberia    5,000,000 

Koumauia    0,666,066 

Total     $7,206,476,066 

The  fiscal  jjolicy  of  the  Treasury  in  raising  funds  for  these 
staggering  exi)en(litures  has  been  on  the  whole  an  admirable 
one.'  Advantage  has  been  taken  of  the  mistakes  of  other  bellig- 
erents, and  a  very  judicious  balancing  of  short  term  financing, 
taxes  and  long  term  Ixmds  has  been  devised. 

Professor  Bogart's  table  ''  for  the  revenues  of  the  United  States 
for  three  fiscal  years  is  as  follows: 

Source  1915-16  1910-17  1917-18 

Customs    $213,185,845  $225,%2,393  $220,000,000 

Internal  revenue: 

Ordinarv     30,?,486,474  354,387.420  973,000.000 

EmerKctK-7  84,278,302  95,297,554 

Corporation  income  tax  56,W3,658  179,572,888  535,000.000 

Individual  income  tax..  67.943,595  180,108,340  0f)6,000,000 

Excess  profits  tax 1,226,000,000 

Sales   of   public   land 1,887,062  1,892,893  1,800,000 

Misc.llaneous    52,012,529  80.952,632  265,000,000 

Total    $779,788,005         $1,118,174,126         $.5,886,800,000 

Less  normal  revenues 779,788,065  779,788,005 

War  revenues  $3.18,386,0()1         $3,107,011,935 

'  The  adverse  criticisms  have  alrea<ly  been  indic^ited  They  relate  to  the 
reactiiiMs  of  the  Treasury  policy  on  the  Rold  policy  and  discount  policy  ot 
the  Federal  Reserve  Butrd. 

'  C/'.  nr ,  pane  4. 


THE    UNITED   STATES 


181 


,1 


This  table  was  prepared  before  the  actual  revenues  were  col- 
lected in  1918.  Approximately  correct  for  customs  and  approxi- 
mately correct  also  for  actual  receipts  for  internal  revenues,  as 
shown  in  the  report  of  the  Treasury  Department  of  September 
i,  lt)lS  (when  collections  of  $;5,Ci»4,703,3:{4  were  recorded),  it 
probably  underestimates  by  a  very  substantial  amount  the  total 
internal  revenues  when  evasions  and  delinquents  and  under- 
estimates by  tax  payers  are  all  straightened  out.  In  a  single  day, 
the  authorities  of  the  Treasury  concerned  with  revising  the  tax 
returns  picked  up  an  extra  hundred  millions  from  a  single  indus- 
try. Good  authorities  have  expressed  the  opinion  that  the  total 
revenues  from  taxes  and  customs  for  the  fiscal  year  1917-1918 
will  reach  $4,.')00,000,0()().  For  the  fiscal  year  lOlS-]!)!!),  new 
legislation  is  pending  which  is  expected  to  bring  the  tax  receipts 
up  to  $8,000,000,000. 

Such  taxes,  wholly  apart  from  the  further  drains  on  the  income 
of  the  people  through  the  enormous  loans,  would  have  been 
deemed  incredible  by  students  of  taxation  a  few  years  ago.  The 
total  income  of  the  country,  including  all  interest,  wages, 
profits  and  rents,  was  estimated  in  11)10  at  $30,500,000,000. 
$8,000,000,000  in  taxes  would  have  been  an  enormous  propor- 
tion to  take  from  this.  The  appropriations  now  made  by 
Congress  for  the  fiscal  year  1918-1919  substantially  exceed  the 
total  income  of  the  country  for  1910.  None  the  less,  the  country 
is  bearing  its  burden  of  taxes  and  in  addition  is  subscribing 
heavily  to  lilxjrty  loans.  The  First  Liberty  Loan,  dated  June  15, 
1917  (15-30  year  loan)'  amounted  to  $2,000,000,000;  the  Sec- 
ond Liberty  Loan,  dated  November  15,  1017  (10-J5  year  loan) 
amounted  to  $3,H0H.7«<i.l50;  the  Third  Liberty  Loan,  dated 
May  9,  191M  (10  year  loan)  amounted  to  $4.l70,510,H.5O ;  the 
Fourth  Liberty  Loan,  daf-d  Oct()l)er  24.  1918  (15-20  year  loan) 
has  exceeded  $ri,9()0,(»00,000,  making  a  grand  total  of  more  than 
$1(I,900,(M)0,000  raised  in  liberty  loans  by  the  end  of  Octolxr, 
1018,  with  the  certainty  that  further  and  even  greater  loans  will 
come  as  long  as  the  war  continues. 

'  An   excpttenf   "  cotupri-ttx "   of  the   four  liberty   loans  appears  in  the 
Economic  H'orld  of  Octotur  12,  t<>lH.  page  523. 


ti 


I: 


:!, 
j! 

! 
■-  1 

■  i 


u 


182     EFFECTS  OF  THE  WAR  ON    MONEY,    CREDIT   AND  BANKING 


1* 


Vet  another  important  source  of  income  for  the  government 
has  been  in  the  sale  of  war  savings  stamps  and  thrift  stamps, 
designed  to  reach  the  smallest  savings.  The  total  receipts  from 
this  source,'  by  October  23,  11)18.  were  $807,222,544. 

The  explanation  of  the  ability  of  the  country  to  meet  such 
extraordinary  financial  burdens  is  to  be  found  in  the  figures 
which  we  have  given  before  -  for  the  growth  in  the  income  of 
the  country.  Under  the  joint  influence  of  expanding  physical 
volume  of  production  and  rising  prices,  the  income  of  the  coun- 
try has  risen  from  $.!u.r.()(».()()(».(»(>0  in  KdO  and  $32,(i00,()00.000 
in  l!n4  to  .l!4!t.2O(),(IO(».()()0  in  1!»1(J.  to  $(;s,«0(t,t»O0,()0O  in  1«J17, 
and  to  well  over  $7(»,(too,(K)0.()00  in  11)18." 

But  not  even  this  great  growth  of  the  income  of  the  people 
of  the  United  States  was  sufficient  to  enable  them  to  meet  the 
whole  burden  of  war  finance  without  temporary  resort  to  ex- 
pansions of  credit  by  the  banks.  The  amounts  involved  were  too 
great,  and  the  shock  to  industry  and  trade  of  such  subtractions 
taken  in  large  blocks  from  the  current  incomes  of  the  people  or 
of  businesses  would  have  brought  bankruptcies  and  demoraliza- 
tion. Exi)ansions  of  credit,  largely  temporary,  have  for  the 
most  part  eased  the  tension  and  made  the  process  a  wonderfully 
smooth  and  frictionless  one.  For  this,  the  policy  of  the  Treas- 
ury in  anticipating  tax  payments  and  lilwrty  loans  by  short  term 
Treasury  certificates  is  in  large  degree  responsible,  though,  as 
we  have  seen,  the  machinery  of  the  federal  reserve  system  has 
also  aided  vers  greatlv.  The  government  has  commonly  spent 
the  ta.^  receipt"^  and  the  lilK-rty  loans  In; fore  the  i)eople  have  paid 
them,  it  has  done  tliis  I)y  selling  in  advance,  very  largely  to  the 
banks,  sho.t  term  Treasury  certificates  maturing  about  the  time 
the  tax  !)aymeiits  or  the  liberty  loan  payments  were  due.  The 
vdluttie  of  these  short  term  certificates  has  risen  and  fallen,  rising 
to  liillions  just  before  the  tax  payments  or  the  liberty  loan  pay- 
ments were  due.  and  falling  greatly  as  tax  payments  and  liberty 
loan   |)ayments  canu'   in   and   the  government   returned   to   the 


'  New  York  Lr-tiiii,i  I'nsI,  October  26,  1918. 
'  I 'ant  l.Sf). 

•/;(/<•    /  ,i/m.-    ,'t    M<'nc\\   puKi-^    2(>7-27X.   ami 
|»aKi's  5-()  anil  fil. 


.tnnalisl,    lamiarv    (>,    1919, 


THE    UNITED   STATES 


183 


banks  the  short  term  advances  made.  In  part,  too,  the  Treasury 
certificates  have  been  taken  by  large  tax  payers  or  prospective 
purchasers  of  large  blocks  of  liberty  bonds,  and  these  Treasury 
certificates  have  been  accepted  by  the  government  in  lieu  of  cash 
in  payment  of  taxes  or  in  payments  on  liberty  loans. 

Further,  however,  the  banks  have  been  called  upon  to  purchase 
the  liberty  bonds  themselves  and  to  make  loans  on  liberty  bond 
collateral  to  purchasers  of  these  bonds.  The  extent  of  this  will 
receive  consideration  below.  Banks  have,  moreover,  been  obliged 
to  no  small  extent  to  make  temporary  advances  of  funds  and 
possibly  even  long  time  advances  of  funds  to  various  businesses 
to  enable  them  to  meet  the  tax  payments,  particularly  the  excess 
profits  tax  payments  of  corporations  whose  "  profits  "  have  con- 
sisted, in  part,  of  nonliquid  assets. 

The  traditional  policy  of  an  American  Congress  in  meeting  a 
war  emergency  has  been  to  rely  largely  on  long  time  loans  and 
only  gradually  and  through  a  long  period  of  years  to  raise  the 
revenues  required  to  pay  them  off.     This  tradition  represents  a 
great  advance  over  the  Civil  War  practice,  when  during  the  early 
period  of  the  war  much  of  the  burden  was  carried  by  the  issue 
of  inconvertible  paper  money.    It  is  probable  that  in  the  absence 
of  vigorous  action  by  certain  American  economists,  the  loan 
policy  would  have  been  pursued  to  extremes  in  the  present  war. 
At  the  outbreak  of  the  war.  however,  a  strong  movement  was 
begun  to  finance  the  war  largely  by  taxes.    The  leading  figure 
in  this  movement  was  Professor  O.  M.  W.  Sprague,  whose  writ- 
ings during  the  winter  and  spring  of  11)17  had  the  significance 
of  a  great  state  paper.    In  our  discussion  of  loans  and  taxes  in 
France,  we  have  criticised  Professor  Sprague's  view  as  repre- 
senting an  exaggeration,  and  had  his  extreme  program  been  car- 
ried out  it  would  have  been  unfortunate.     The  significance  of 
his  work,  however,  is  to  be  found  in  the  fact  that  a  much  heavier 
taxation  program  than  would  otherwise  have  been  employed 
was  put  through,  and  it  is  prt)bably  just  to  say  that  Professor 
Sprague  purposely  cast  his  argument  in  a  somewhat  extreme 
form,  l)eing  well  aware  that  the  opponents  of  his  plans  would 
make  all  the  qualifications  that  were  necessary,  and  that  the 


M 


1' 


184     EFFECTS  OF  THE   WAR  ON    MONEY,   CREDIT  AND  BANKING 

great  danger  was  that  taxes  would  be  too  light  rather  than  that 
they  would  be  too  heavy.' 

Among  the  arguments  which  have  been  offered  against  the 
employment  of  loans  and  bank  credit  in  financing  the  war  has 
been  the  contention  that  such  a  policy,  leading  to  an  expansion 
of  bank  credit,  would  force  up  prices — an  argument  commonly 
cast  in  the  mold  of  the  quantity  theory,  though  not  necessarily 
involving  cjuantity  theory  reasoning.  To  the  astonishment  of 
most  adherents  of  the  quantity  theory,  the  period  since  the  great 
expansion  of  bank  credit  growing  out  of  liberty  loans  has  not 
been  the  period  of  rapidly  rising  prices.  It  will  be  most  con- 
venient to  discuss  this  matter  in  connection  with  the  discussion 
of  prices  in  the  United  States.  It  is  enough  to  point  out  at  this 
time  that  connuodity  prices  had  their  great  rise  between  Decem- 
ber, 1!M*(,  and  June,  1!>17,  that  since  June  and  July,  1917,  the 
average  of  commodity  prices  lias  been  fairly  stable  in  the  United 
States;  and  that  from  June.  lUlT,  to  the  middle  of  1918  stock 
and  bond  |)rices  have  had  on  the  whole  a  steadily  downward 
course,  while  there  has  been  something  approaching  panic  in  the 
real  estate  markets  in  several  of  our  greater  cities. 

Those  writers  who  see  nothing  but  "  inflation  "  in  expanding 
bank  credit  during  periods  of  stress,  emergency  and  rapid  transi- 
tion, fail  wholly  to  take  account  of  the  essential  functions  of  the 
f)ank  credit.  Rank  credit  expands  when  transitions  are  to  l^e 
accomplished.  .An  enormous  volume  of  new  bank  credit  has 
been  reciuired  to  finance  the  shifting  of  industry  from  peace 
occupati(ins  to  war  occupations,  to  finance  the  huge  receipts  and 
disbursements  of  the  Treasury,  to  ease  the  tension  of  tax  pay- 
ments, to  enable  business  men  to  li(|uidate  slow  asstts  while 
chan,i;ing  the  character  of  their  production  and  meeting  the  bur- 
den of  taxes  and  loans.  Hxpansion  of  bank  credit  is  necessitated 
by  the  "  hoarding  "  of  dej)osits  by  business  men  who  feel  the 
necessity  of  keeping  an  uiuisually  li(iuiil  position  in  tiiues  of  stress 
and  uncertainty,     it  is  hard  to  understand  what  the  "  infiation- 

'  Tlif  pri'st-nt  writir  t.ikvs  thi'  Rrcatcr  pleasure  in  ni.ikiiiK  ihis  m-knowlcdg- 
mfiit  ti)  F'ri'fi'^^'ir  SprnK"' .  musimtcli  ;i<  hv  felt  calti-cl  \ipiin  to  criticize  in 
soim  nicTiiiic  I'rufessnr  Spraniu's  plan  in  the  sprinp;  of  l'>17.  See  "  Con- 
siriiilion  of  Wcaltli,"  .Imuitisl,  April  16,  1917, 


•Ml 


THE    UNITED    STATES 


185 


s  -; 


ist  "  theory  would  have  banks  do  in  a  great  emergency.  It  is 
certain  that  it  banks  refused  to  expand  their  credits  in  times  of 
stress,  we  sliould  have  demorabzation  and  chaos— as  has  been 
abundantly  exemplified  in  our  discussion  of  war  time  conditions 

in  France. 

It  will  be  interesting  to  examine  statistically  the  extent  to 
which  the  war  finance  of  the  United  States  Government  has  been 
accompanied  by  bank  expansion.  Precise  measurements  appear 
at  the  present  time  to  be  impossible,  but  certain  significant  figures 
can  be  presented  which  will  make  it  clear  that  the  apprehensions 
expressed  in  the  spring  of  l!tl7  that  the  loan  policy  would  lead  to 
excessive  expansion  were  on  the  whole  unfounded.  The  follow- 
ing figures  dealing  with  bank  resources  are  of  course  a  crude 
index,  but  are  none  the  less  significant.  They  represent  resources 
of  all  banks  reporting  to  the  Comptroller  (including  national, 
State,  savings  and  private  banks  and  trust  and  loan  companies, 
but  excluding  federal  reserve  banks)  and  resources  of  federal 
reserve  banks. 

(In  millions  of  francs) 

June  30        June  23        June  30        June  30 
■^  1914  1915  1910  1917 

National  and  State  banks^^^^^  27.804  32,271         37,126 

Federarre'scrve  system..      '  381  025  2,000 

»The  fiiiuri'  lor  1918  is  based  on  the  Comptroller's  figures  for  national 
hanks  as  of  May  10,  and  the  figures  for  State  institutions  at  about  the  same 
date  prepared  by  Mr.  R.  N.  Sims.  Examiner  of  State  Banks  in  Louisiana. 
sVtJJalisl.  August  12,  1918,  page  150.  For  other  years  the  •^"."'P',?'''^'. '^ 
figures  are  used  These  figures  are  not  the  Comptroller  s  figures  for  bank- 
ing power,"  but  for  total  resources. 
BJune  21,  1918. 

The  figures  for  the  banks  other  than  the  federal  reserve  banks 
show  that  the  great  expansion  of  bank  resources  occurred  before 
the  entrance  of  the  United  States  into  the  war.  Trom  June, 
1!)1.'»,  to  June,  r.117,  the  expansion  was  nearly  ten  billions;  from 
June,  1'.»17,  to  June,  I'.UH,  the  expansion  was  a  little  over  three 
billions.  The  main  expansion  since  the  United  States  entered  the 
war  has  l)een  in  the  federal  reserve  banks  themselves.  But  the 
figures  for  expansion  by  the  federal  reserve  system  do  not  repre- 
sent net  addition  to  the  banking  resources  of  the  country.    To  the 


1913 

»  40,525 
■"  3.800 


:■  i. 


1  r 


f  1 

It 


\  li 


1 

Hi 


1  * 

ii 
111 


ISfi     EFKECTS  OF   THE  WAR  ON    MONEY.   CREDIT   AND   BANKING 


extent  of  over  two  billion  dollars  they  represent  gold  transferred 
by  the  other  banks  to  the  federal  reserve  banks,  and  on  the  lia- 
bility side,  viewed  from  tlie  standpoint  of  addition  to  the  circu- 
lalinfj  currency  of  the  country,  the  only  items  in  the  federal 
reserve  banks'  balance  sheets  which  should  be  considered  are  the 
excess  of  federal  reserve  notes  over  the  gains  in  gold  and  the 
government  dei)osits  subject  to  check. 

Instead,  tiierefore,  of  increasing  the  rate  of  expansion  of  bank 
rc<iiurccs,  the  entrance  of  the  United  States  into  the  war  and  the 
vast  loans  of  the  government  down  to  June.  l!)ls,  were  accom- 
panied by  a  marked  reduction  in  the  rate  of  expansion. 

The  following  charts,  co%'ering  the  period  March  1  to  October 
11.  V.^IS,  tell  a  similar  story  for  the  member  banks  of  the  federal 
reserve  system  reporting  to  the  federal  reserve  banks.  The  first 
chart  shows  the  growth  oi  demand  deposits  and  of  total  loans, 
investments  and  Treasury  certificates  of  indebtedness,  together 
with  the  ratio  l)etween  them,  for  the  reporting  member  banks 
in  all  twelve  districts  and  for  the  reporting  member  banks  in  the 
New  York  district.  For  the  member  banks  in  all  twelve  districts, 
demand  de])osits,  including  government  deposits,  show  almost  no 
increase  during  this  period,  while  for  the  Xew  York  district, 
there  appears  even  a  slight  decline.  During  this  same  period,  the 
government  deposits  and  deposits  by  foreign  governments  with 
the  federal  reserve  banks  have  remained  small,  around 
.$:?On,(HM).oo(».  The  second  chart  shows  the  amount  of  war  obli- 
gations of  the  United  State'^  held  I)y  the  reporting  member 
banks,  either  owned  outright  or  made  the  basis  of  loans, 
together  with  the  total  earning  assets  of  these  banks,  and  the 
proportion  of  total  earning  as>ets  represented  by  United 
States  war  oliligations.  The  black  area,  indicating  United  States 
bonds  owne<l,  exaggerates  the  outright  ownershij)  of  lil)erty 
bonds,  since  it  includes  some  hundreds  of  millions  of  the  old 
bonds  securing  national  bank  note  circulation.  On  the  whole, 
the  liberty  bonds  have  been  taken  by  the  peo|)le.  The  area 
representing  loans  .secured  by  United  States  obligations  is  again 
gratifyingly  small.  On  the  whole,  the  people  have  paid  for  their 
liberty  bonds  out  of  current  income.    The  main  item  in  the  exten- 


t^-  > 


THE    UNITED   STATES 


187 


1918 

RATIO  OF  LOANS  AND  INVESTMENTS  (OTHER  THAN  U.S.  GOVT 
LONG  TERM  SECURITIES) -TO-  DEMAND  DEPOSITS (iNCLUSIVi 
„0F  U.S.  GOVT  DErOSITS)OF  REPORTING  MEMBER  BANKS. 


(*)  TOTAL  LOANS.  INVEST- 
MENTC  AND   CEHT1FICATE6 
OF  INOEBTEONEBS 


(61  TOTAL  DEMAND 
DEPOSITS  -  INCLUCINQ 
GOVERNMENT  DEPOSITS 


(C>  RATIO  OP  LOANS  AND 
tNVCSTMENTS  TO  CEF06IT6 


2.50 


2.00 


1.50 


1.00 


.50 


(r)  KATIO  OF  LOAKt  AND 
tNVCITMENTft  TO  OCPOSITS 


(0)  TOTAL  LOANt,  ISVMT. 
MENT5  AND  CERTIFKATI* 
OF  INDCBTCDNEM 


(E) TOTAL  DEMAND 
DEPOSITS  •  INCLUDING 
COVENNMENT  DEPOSIT* 


3 


••a**- 2";*^*;5S 


15 


2.00 


1.50 


1.00 


.50 


(C)-. 


12 


(F). 

6 

(0) 

(El 


MEMBER  BANKS 
IN  ALL  12  DISTRICTS 


[cl 


MEMBER  BANKS 
IN  NEW  YORK  DISTRICT 


M. 


0     0  -•s:s"«sf«::s-s:«':tt-*!Sfstf:»s— s!t'5ts*s;«:>;:st 

i    I   i    I  i  i    i  i  i    i  i    t 


5  i 


If 

f'i 


i  I 


i:  r 

111 


tis 


1S8    Erri:cTS  of  the  war  on  monky,  crkdit  and  b  vnking 


1918 


EARNING   ASSETS   OF  REPORTING  MEMBER    BANKS 
AND    PROPORTION   OF   EARNING  ASSETS 
,  REPRESENTED   BY  U.S.  OBLIGATIONS 


l(A>U.8.  BONDS  OWNtD 


5(B)U.S.  CEBTIFICATtS  OF 
i  INDEBTEDNESS  OWNED 


p^  f  C  t  LOANS  SECbWEO 
f.  . -.  J   av   U.S.  OBLlGATlONft 


rrrilD)OTHER  L0AN6 
r^    .  J   ANOlNve.TMENTa 


.  (  E>  PERCENTAGE  OF 
TOTAL  EARNING 
ASSETS  REPRESENTED 
«T    A  +  B+C 


','c 

rh 

50 

15 

40 

12 

30 

9 

20 

6 

(E)-» 

10 

3 

0 

0  ■ 

40 

12 

30 

9 

20 

( 
6 

10 

3 

0 

0 

i 


t    !■: 


^  J^fi^S^S*""** 


ENTIRE  12  DISTRICTS 


NEW  YORK  DISTRICT 


(E)    . 


1    i    i    I   i    ^    M   t    i   i    ^ 


THE    UNITED   STATES 


IHTt 


sions  of  credit  by  these  hanks  in  connection  with  war  finance  V.:\.^ 
been  in  the  short  term  certificates  of  indebtedness,  issued  liy  the 
Treasury  in  anticipation  of  loans  and  taxes.  These  have  risen, 
as  we  have  seen,  to  lar^c  proportions  preceding  loan  or  tax  pay- 
ments, and  iiave  declined  as  the  government  receipts  from  taxes 
and  long  term  loans  have  come  in.  What  extension  has  taken 
place  between  March  1.  V.)1H.  and  October  11,  lOlS,  has  taken 
pl.i'  (■  in  the  federal  reserve  banks  themselves  and  not  in  the  main 
body  of  the  banks  which  deal  directly  with  the  peoi)le.  The 
expansion  in  the  federal  reserve  banks  coimected  with  war 
finance  during  the  period  covered  by  these  charts  has  been  approx- 
imately a  billion  dollars,  the  main  item  being  "  bills  discounted 
secured  by  government  war  obligations."  Bearing  in  mind  the 
tremendous  operations  involved  in  the  period  covered,  which 
includes  the  Third  Liberty  Loan  of  $4,177,000,000,  the  payment 
of  nearly  $4,000,000,000  of  taxes,  and  the  issue  of  several  bil- 
lions of  short  term  Treasury  certificates  in  anticipation  of  the 
Fourth  Liberty  Loan,  this  is  a  showing  which  few  would  have 
been  optimistic  enough  to  expect  a  year  before. 

But  this  is  not  to  discount  the  value  of  the  forebodings  issued 
by  many  economists  at  the  outbreak  of  the  war.  By  pointing 
out  the  danger  of  undue  bank  expansion,  they  have  aided  in 
preventing  it,  though  the  caution  of  bankers  and  business  men 
would  have  largely  done  so  in  any  case.  Men  do  not  pay 
interest  at  the  banks  for  amusement.  Banks  do  not  extend  their 
loans  lightheartedly  without  seeing  where  they  may  expect  to 
come  out.  With  the  tremendous  uncertainties  in  the  minds  of 
both  bankers  and  business  men  as  to  the  future  of  business,  with 
the  grave  uncertainties  which  have  at  times  existed  since  our 
entry  into  tlio  war  as  to  the  outcome  of  the  war  itself,  with  the 
certainty  that  perplexing  problems,  if  not  unmanageable  prob- 
lems, would  have  to  be  met  at  the  end  (  f  the  war.  business  men 
and  bankers  have  both  been  cautious  in  accepting  and  in  making 
loans. 

People  generally,  moreover,  have  borrowed  from  the  banks  to 
a  verv  small  extent  for  the  purpose  of  enabling  them  to  continue 
ordinary  consumption.     It  would  I)c  this  kind  of  borrowing 


n 


1 1 


I'  '■■' 

f    ;  ; 
i-  p 


;u 


ion    i:i-i-i;cTS  OF  tiik  war  on  money,  ckkdit  and  banking 


which  would  he  most  ol)jcctioii:il>le  and  which  would  have  the 
jjreatcst  tciideiKv  i^  raise  c<iinm(Klity  prices.  The  essential  thintj 
in  ciinnectiiin  with  war  finance  is  that  it  shall  provide  a  mechan- 
ism wherei.y  the  current  tlnu  of  <^oods  and  services  in  the  couiUry 
may  l)e  diverted  from  the  consumption  of  the  people  to  the  use 
of  the  <,'i>vernment.  If  the  people  try  to  continue  their  customary 
c*'nsumi)ti<)ii  of  g(><Hls  and  services  at  the  same  time  that  the 
government  is  ennrmously  increasing  its  expenditures,  so  that  the 
people  are  com|)eting  with  the  government  in  the  markets  for 
iahor  and  >upi)lies,  the  result  will  i)e,  of  course,  assuming 
that  the  labor  a.id  other  resources  of  the  country  are  fully  em- 
ployed, to  force  prices  up.  Rut  neither  in  normal  times  nor 
apparently  at  the  present  time  are  loans  for  ordinary  consump- 
tion purposes  important  elements  in  the  assets  of  American 
banks.' 

in  very  large  measure,  moreover,  as  the  government  operations 
have  nuule  demands  upon  the  loan  funds  of  the  banks,  other  bor- 
rowers have  dropi)ed  out.  Building  operations  have  largely 
stopped.  In  general,  long  time  construction  for  ordinary  pur- 
poses has  been  greatly  reduced.  Few  men  would  have  the  hardi- 
hood to  build  new  plants  at  prevailing  '■"  '  costs  with  the  prac- 
tical certainty  facing  them  that  after  i.  ar  competing  plants 
can  be  built  at  nuicli  lower  costs. 

There  has  been,  moreover,  a  very  definite  and  vigorous  eiTort 
on  the  part  of  the  government  and  the  banks  to  curtail  credits  to 
non-essential  industries.  This  has  been  part  of  a  large  ^'  heme 
wherel)y  tran.sportation  facilities,  coal,  copper,  steel,  labor  and 
other  basic  necessities  of  production  have  been  diverted  from 
non-essential  industries  to  the  industries  needed  for  war.  As 
early  as  January.  r.H.'i,  the  stock  exchange  in  London  issued 
orders  in  conjunction  with  the  Treasury,  limiting  the  issues  of 
new  securities  in  the  United  Kingdom  during  the  war  to  such 
issues  as  could  be  slu)wii  to  the  Treasury  to  be  advisable  in  the 
national   interest;  and  a  vigorous  control  on   the  part  of   the 

'  Tluri'  really  should  nut  liavo  liitn  serinus  appnlu'tisions  that  tlic  .Xmcricati 
haiik^  would  lend  or  the  .Xnuruan  jjeojile  try  to  borrow  many  billions  ot 
dollars  to  In-  speMit  on  ordinary  idti^ntnption.  The  people  have  eurtailed 
consiniiptioM,  particularly  ihe  huynu;  ..f  ant'imobiles.  pianos,  furniture,  expen- 
sive rug'-,  e,iriiet>,  enrlains  and  the  like  and  also  food  ami  clotbiiig. 


THE    L'MTED    STATES 


191 


Treasury,  the  banks  and  the  stock  exchange  has  since  been 
exerted  in  Great  Britain  not  only  over  the  issues  of  new  corpora- 
tion securities,  but  also  over  ordinary  loans  at  the  banks.  This 
was  particularly  easy  in  (Jreat  Britain  since  a  small  number  of 
great  j<  int  stock  banks  with  numerous  branches  largely  domi- 
nated the  banking  situation. 

With  the  outbreak  of  the  war  in  the  United  States,  it  was  at 
first  thought  that  it  would  be  difficult  for  the  banks  to  develop 
an  effective  control  in  this  matter,  in  view  of  the  fact  that  we 
have  many  thousands  of  independent  competing  banks.  A  desir- 
able customer,  refused  a  loan  at  one  bank,  might  take  his  account 
to  another  bank  and  there  get  the  accommodation  he  wished. 
There  is  good  reason  to  suppose,  however,  that  informal  control 
worked  out  through  the  banks  under  the  guidance  of  the  Federal 
Reserve  Board  and  the  federal  reserve  banks  has  now  been  made 
effective,  jjarticularly  in  the  larger  centers. 

The  Federal  Reserve  Board  from  the  beginning  of  the  war  has 
with  increasing  emphasis  and  directness  stressed  the  importance 
of  this.  Secretary  McAdoo,  in  his  annual  report  to  Congress  in 
Deceml)er,  1917,  foreshadowed  a  request  for  legislation  dealing 
with  this  matter.  Farly  in  r,»l!S,  a  Capital  Issues  Committee  of 
the  Federal  Reserve  Board,  semi-official  in  character,  was  organ- 
ized, whose  function  it  was  to  pass  ou  proposed  new  issues  of 
securities.  Lacking  power  to  prohibit  such  issues,  it  none  the 
less  had  such  great  influence  through  the  effective  cooperation 
of  banks  throughout  the  country  that  it  was  virtually  able  to  boy- 
cott all  issues  of  which  it  disapproved.  Connected  with  it  were 
local  capital  issues  committees  in  each  of  the  twelve  federal 
reserve  districts 

The  Capital  Issues  Committee  of  the  Federal  Reserve  Board 
surrendered  its  functions  upon  the  organization  of  the  new  War 
Finance  Corporation  in  May.  191S,  to  the  Capital  Issues  Com- 
mittee of  the  War  Finance  Corporation,  though  in  part  the  per- 
sonnel of  the  two  committees  remained  the  same. 

The  War  Finance  Corporation,  organized  formally  on  May  20, 
191 S.  under  authority  of  Congress,'  has  a  capital  of  $.500,000,000 

'  Act  approved  April  5,  1918. 


\ 


1' 


102      EFKlXrS  OF  TIIK  WAR  OX   MON'F.Y.   CREDIT   AND  BANKING 

owiifd  l»y  tlie  L'nited  States  Government.  It  lias  a  twofold  func- 
tion. One  function  is  to  continue  tlic  restrictive  activities  of  the 
earlier  Capital  Issues  Committee,  passinj^  upon  and  limiting  new 
.security  issues.  The  other,  suppo.sed  to  l)e  of  .special  importance 
at  the  time  the  War  Finance  Corporation  was  organized,  is  to 
extend  new  credits  to  essential  industries,  and  very  specially  to 
savings  iianks  and  public  utilities,  which  had  been  suffering  as  a 
consetpience  of  the  changes  of  tlie  past  two  or  three  years. 
Savings  banks  were  suffering  l)ecause  of  a  decline  in  the  market 
prices  of  the  securities  which  tliey  owned,  and  withdrawals  by 
depositors  to  purchase  liberty  Injnds.  Public  utilities,  as  gas 
plants,  electric  railways,  electric  light  plants  and  the  like,  had 
been  suffering  because  their  rates  were  hekl  stationary  by  law 
while  their  costs  were  rising.  It  was  expected  too  that  very  many 
of  the  industries  most  vital  to  the  war  would  need  more  new 
capital  than  they  could  get  through  ordinary  banking  channels, 
particularly  in  view  of  the  fact  that  the  federal  reserve  banks  are 
forbidden  to  rediscount  stock  and  bond  collateral  loans.' 

The  machinery  wiiereby  credits  were  to  l)e  provided  by  the 
War  b'inance  Corporation  was  complex.  In  general,  they  were 
ex])ected  to  lend,  not  cash,  but  their  own  notes,  maturing  in  from 
one  to  live  years,  eligible  as  collateral  at  the  federal  reserve 
banks,  and  it  was  expected  that  they  would  lend  these  notes,  not 
directly  to  the  enter])rises  which  needed  the  accommodation,  but 
rather  to  banks  wliich  represented  these  industries,  and  which 
would  act  as  intermediaries  between  the  industries  and  the 
War  Finance  Corporation.  The.se  notes  were  to  be  turned  over 
to  banks,  in  return  for  notes  of  the  banks  .secured  by  stock 
and  bond  or  otlu;r  collateral.  In  other  words,  the  War  Finance 
Corporation  would  take  over  from  the  banks  stock  and  lx)nd 
collateral  loans,  not  eligiitle  for  rediscount  at  the  federal  reserve 

I  he  writer  ventures  to  call  .itteiitiim  to  his  coiilcntion  in  Ins  I'alui'  of 
Mmu-y.  ii.i!.;es  5IK-5.'(i,  that  the  federal  reserve  hanks  shuultl  he  authorized 
to  redisemint  simk  and  linml  collateral  loans  and  that  witliout  this  power 
tluy  cimid  iict  provide  their  inosl  etVective  aid  in  emerneneies.  The  new  War 
linani-e  (iirii.iralion  is  an  indirect  device  for  ;iccoinplishinK  just  this  end. 
The  main  war  tune  function  of  the  federal  reserve  hanks  has  lieeii  to  redis- 
count loans  on  collateral  in  any  case,  since  loans  on  Rovcrnineni  securities 
(not  included  in  the  scleral  prohihition )  constitute  their  chief  carninff 
asset. 


THE    UNITED   STATES 


193 


banks,  and  would  give  them  in  return  its  own  securities  which 
were  eligible  as  collateral  at  the  t'cleral  reserve  banks.  In 
exceptional  cases,  the  War  Finance  Corporation  was  authorized 
to  make  advances  directly  to  essential  industries,  including  sav- 
ings banks  and  public  utilities,  without  the  intermediation  of 
banks,  and  even  in  the  form  of  cash.  The  limitation  upon  the 
extensions  of  credit  of  the  War  Finance  Corporation  originally 
proposed  was  $1,5<)0,()()(),()00.  This  was  subsequently  reduced 
to  $:!,.")0(),(l()(),()()0. 

In  practice,  the  machinery  has  proved  too  complex  and  virtually 
all  the  extensions  of  credit  made  by  the  War  Finance  Corporation 
down  to  October  lo,  1!)1H,  have  been  made  without  the  inter- 
mediation of  banks.  The  banks  would  have  had  to  pay  a  higher 
rate,  for  one  thing,  in  borrowing  on  War  Finance  Corporation 
collateral  at  the  federal  reserve  banks  than  in  borrowing  on  gov- 
ernment war  paper,  or  in  rediscounting  commercial  paper.  The 
total  of  all  credits  provided  by  that  date  was  $r^:2()-2,r>\)2.  The 
most  important  extensions  of  credit  made  by  that  date  were 
$L>().()(»o,()00  to  the  Bethlehem  Steel  Corporation,  $17,320,000 
to  the  Brooklyn  Rapid  Transit  Company.  $3,2:5.^),000  to  the 
United  Railways  of  St.  Louis,  and  $1,000,000  to  the  Northwest- 
ern Electric  Company. 

Various  efforts  have  been  made  by  financiers  in  the  course  of 
the  late  summer  and  fcil  of  1918  to  increase  the  usefulness  of 
the  War  Finance  Corporation,  particularly  by  creating  corpora- 
tions of  semi-banking  character  which  should  stand  between 
public  utilities  and  other  needy  torrowers  and  the  War  Finance 
Corporation.  A  ruling  of  the  Attorney  General  to  the  effect  that 
the  War  Finance  Corporation  could  not  lend  more  than 
$.")0,000,000  to  any  one  borrower  made  it  difificult  for  these  plans 
to  go  through  on  the  scale  originally  contemplated.  One  such 
organization,  known  as  the  Essential  Industries  Finance  Corpora- 
tion, incorporated  under  the  laws  of  New  York  with  an  initial 
capital  of  $3,000,000,  has  been  approved  by  the  Capital  Issues 
Committee  of  the  War  Finance  Corporation.' 

In  the  interval,  the  savings  bank  situation  seems  largely  to 

'  ChicaRO  Banker,  September  28,  1918;  Xetv  York  Times,  October  31,  1918. 


-;j! 


J!i 


Hl4      i:!  IKCTS  OF   THE  WAR   OX    MONKY,    CUEDIT   AND   BANKING 

have  taken  care  of  it.-elt  in  view  of  the  extension  of  sucli  aid  as 
was  necessary  by  ordinary  lianks,  and  in  view  of  the  interrup- 
tion of  tlie  downward  course  of  investment  l)onds  since  Decem- 
ber, I'.UT. 

The  ton  iL;reat  conii)le.\ity  of  the  machinery  has  made  it  (Hfti- 
cu'it  for  llie  War  b^inance  Corporation  to  do,  down  to  the  end  of 
October,  a  very  important  constructive  work.  It  has,  however, 
pcrforiiu'fl  very  important  services  on  the  negative  side  in  super- 
vising and  limiting  tlie  issues  of  new  securities.  There  was  some 
discussion  of  a  proposal  to  e.xtend  its  functions  in  tliis  matter  to 
cover  all  loans  made  by  banks  exceeding  $1(»(»,0<I0,  but  after  a 
conference  with  the  leading  bankers  of  the  country  this  scheme 
seems  to  have  been  dropjied.  The  banks  them.seh\s  appear  to 
be  exercising  sufficient  control  over  loans,  and  the  necessity  of 
having  the  approval  of  the  War  Finance  Corporation,  or  even 
of  its  local  representatives,  would  introduce  so  much  delay  and 
friction  in  banking  operations  as  probably  to  bring  on  a  com- 
mercial crisis  of  the  first  order. 

During  late  October  and  early  November.  I'.Us,  there  has  been 
some  discussion  of  extending  the  activities  of  the  War  binance 
Corporation  for  a  longer  period  than  that  originally  contemplated, 
ami  of  making  it  an  important  in>trumemality  in  the  after  the 
war  adjustment.  Secretary  McAdoo  has  been  (juoted  as  favoring 
such  a  proposal.  It  is  not  impossible  that  the  organization  might 
advantageously  take  over  supervision  of  the  delicate  prolilem  of 
readjusting  governmeiU  cotitracts  with  nuuiition  plants,  aircraft 
plants,  and  other  war  industries  whose  operations  must  stop 
inunediately  after  the  war.  If  that  adjustment  is  left  to  the  slow- 
machinery  of  the  Court  of  Claims  and  c  )ngressional  appri.])ria- 
tions,  very  great  delay,  injustice  and  demoralization  may  ensue. 

In  additoii  to  coiurol,  worked  out  informally  by  the  individual 
b.inks,  over  extensions  of  credit,  there  was  organized  on  Septem- 
ber IT,  rUT,  a  subcommittee  ou  money  rates  of  the  New  N'ork 
liberty  lo.ui  committee,  composed  of  the  leading  b.mkers  of  the 
citv.  This  coimnittec  ha--  pro\ide(l  funds  where  necess;iry  for 
the  protection  of  the  stock  market  and  particularly  of  the  blierty 
loans,  and  l;as  also  acte<l  to  check  speculation,  iiotalily  during 


THE    UNITED   STATES 


195 


October,  I'.Ms,  and  especially  by  a  ruling;  that  banks  should 
require  a  margin  of  :!••  per  cent  on  collateral  loans  made  to  stock 
brokers  where  an  average  of  2<>  per  cent  had  lieen  previt)usly 
required.' 

There  has  thus  been  an  aihnirable  dovetailing;  of  etiforts  on 
the  part  of  individual  banks,  federal  reserve  banks,  and  the 
Treasury,  the  various  authorities  concerned  with  the  control  oi 
supplies  of  copper,  steel,  transportation  and  the  like,  and  the 
ordinary  individual  consumer,  all  tending  to  transfer  funds  to 
the  government  without  undue  expansion  of  bank  credit,  all 
tending  to  lessen  tlie  competition  of  the  general  public  in  the 
market  for  goods  and  services  as  the  gcnernment's  expenditures 
have  increased.  On  the  whole,  we  have  worked  out,  largely  by 
informal  organization,  an  admirably  adjusted  situation. 

It  may  not  be  an  uiuiecessary  digression  to  point  out  here  that 
our  war  experience  goes  far  to  prove  that  strong  legal  authority 
in  the  hands  of  the  central  government  is  unnecessary,  that  bank- 
ing concentration  in  the  French  or  English  form  is  unnecessary 
as  a  means  of  controlling  and  mobilizing  the  resources  of  the 
country  in  time  of  stress.  The  common  will  and  the  common  pur- 
pose, (juick  to  respond  to  intelligent  suggestion  from  trusted  lead- 
ers, has  jirobably  proved  more  effective  than  any  degree  of  rigid 
legal  control  could  have  proved.  Our  system  of  forty-eight 
autononK)US  States,  and  thirty  thousand  autonomous  banks,  has 
stood  as  severe  a  test  as  we  have  any  reason  to  anticipate  it  will 
ever  l)e  subjected  to  in  the  future.  Effective  cooperation  need 
not  involve  the  (k->t ruction  of  individual  and  local  liberties. 

'  New  York  Journal  of  Commerce,  October  25,  1918. 


CHAPTER  XVII 


1' 


Prices  in  the  United  F*a;es 

No  subject  in  tlie  ct)iirsc  of  the  war  lias  lieen  more  eagerly 
discussed,  whether  liy  economists  or  liy  tlie  masses  of  the  people, 
than  that  of  risiiij,'  prices.  Tiiere  i>  a  school  of  economists  who 
have  seen  the  wliole  cause  of  risiiif^j  prices  in  the  policy  of  the 
governments  in  borrowing  instead  of  taxing,  and  in  the  policy 
of  the  banks  in  lending  to  the  governments  or  to  the  liolders  of 
government  war  securities.  This  process,  called  "  intlation." 
has  been  treated  by  many  writers  as  an  unmi.xed  evil,  and  a  very 
considerable  i)art  of  the  literature  of  war  economics  has  con- 
sisted of  invective  again>t  the  stupidity  of  those  whose  policies 
led  to  "  intlation."  The  economic  problem'^  of  a  great  war 
would  be  beautifully  simple  if  this  sort  of  analysis  were  really 
fundamental ! 

To  writers  of  this  school,  the  terms  "rising  prices"  and 
"  depreciatinii  of  iikjiu'v  "  have  been  sMiniiyiiMii^  .iiid  tile  funda- 
mental causation  has  been  sougiit  in  monetary  and  banking 
phenomena. 

To  the  present  writer,  it  seems  perfectly  clear  that  the  funda- 
mental causation  involved  lie>  in  the  field  of  production  and 
ciinMini|)tion  and  in  the  tiiMs  of  public  jxilicy  and  social  ])s\- 
cliolngy,  and  that  .so  far  at  least  as  the  I'liited  Stales  are  con- 
cerned the  i)luiinnn.'!ia  of  money  and  banking  have  been  largely 
secondary  and  derived,  adjusting  themselves  to,  rather  than 
causing,  the  niore  fnnihmieiilal  fjutors,  I  his  {v  imt  to  deny  that 
b.inking  policy  lias  had  .uul  has  a  considirable  inlliieiice  on  the 
coursf  of  iirues.  It  is  rather  to  assert  tli.it  the  major  intlueiice 
is  to  be   found  in  souu'tliiii^;  more  fuiulanicMtal. 

rile  fundanu-iit.il  eN|ilaiiatioii  lies  on  the  s;trface.  Fiftv  to 
sixty  million  men.  .111  tiuirnious  pr.  ])ortion  of  tin-  lal>or   fo-ie 


THE    UN'ITF.D    STATES 


107 


of  the  civilized  world,  have  been  taken  dut  fit"  industry  and  put  to 
work  in  the  most  destructive  kind  of  consumption  of  the  products 
of  industry.  Another  and  larf:;er  nuniher  of  men  ha\e  ])een 
diverted  from  the  production  of  goods  f. ir  ordinary  civilian 
consumption  to  the  production  of  munitions  and  army  supi)lies, 
to  the  production  of  shi])|)in,<j  to  replace  tlie  wa^te  of  tlie  L'-hoat 
campaifjn,  to  the  huildinj;;  of  airshi])^  ami  of  elaborate  i)lants  for 
the  production  of  airships,  and  so  on.  The  process  began  first. 
of  course,  in  the  Ijclligerent  countries,  where  also  it  has  gone 
farthest,  but  no  netUral  country  remains  unaffected  by  the 
demands  for  war  materials  and  supplies,  and  in  the  L'nited  States, 
first  as  a  neutral  and  now  as  a  belligerent,  the  process  has  gone 
very  far  indeed.  The  following  quotation  coiuains  the  best 
estimate  the  writer  has  found  of  the  extent  to  which  the  resources 
of  the  L'nited  States  have  been  diverted  from  tlie  production  of 
ordinary  civilian  goods  to  the  prosecution  of  ilie  war: 

An  examination  of  reports  of  tin-  rimutbI  particijiiitioii  of  the  American 
people  in  llic  war  Ic.ids  In  the  cunclu^ion  tliat  of  the  American  population, 
normally  enyaneil  in  gainful  occupations,  fully  one-half  are  devotiiiR  their 
cnerRics  to  the  prosecution  of  the  war.  either  hy  lieariiiff  arms  or  working 
in  industries  charKcd  with  the  production  of  war  materials  and  performance 
of  war  service. 

Accordmn:  to  the  1917  census  estimate,  the  latest  availahle.  the  number  of 
men  engaged  in  gainful  occupation  in  the  United  States  was  .W,091.564  and 
the  nuinlier  of  women  so  engaged  8.075.772.  or  a  total  gainfully  employed 
of  .?8.I67,3.V). 

I'he  mihtiry  establishment  now  nund)ers  approxunately  5,000.000  men. 
This  includes  army,  navy  and  marine  corps.  On  the  government  railroads 
there  arc  2..?0(),000  employed  and  in  the  shipyards  under  government  control 
386.0(X).  The  list  of  civil  .service  employes  has  s|)rutiK  from  166.000  in  1917 
to  approximately  500.000,      1  his  makes  a  listed  total  of  8.186.000. 

The  government  has  taken  over  hoclily  many  munitions  plants  and  other 
industrial  enterprises.  In  .iddition,  it  has  awarded  contracts  to  many  plants 
in  which  75  per  cent  and  in  many  cases  100  per  cent  of  the  workers  arc 
solely  engaged  in  tiirniiig  out  government  material.  With  the  aid  of  the 
Oepartmeiit  of  Labor  and  the  l'nited  .Slates  F.mpjoyment  Service,  it  is  esti- 
mated that  the  nnniher  of  persons  employed  in  these  industries,  operating 
for  government  account,  amounts  to  about  IJ.IHKl.OOO. 

A  total  of  approximately  20.000.000  persons  engaged  in  war  work  there- 
fore is  ohtaineil  The  men  dr.ifted  into  or  enlisted  in  the  military  -ervice 
must  be  suhliai'leil  from  the  total  of  those  normally  engaged  in  gainful  occu- 
pations On  the  other  hand,  tli^'  stress  of  war  has  caused  many  persons 
to  enter  g.iinfiil  occupations  not  previously  so  employed. 


198      tl-KIiCTS  OF   THE  WAR   ON'    MONEY,    CREDIT   AND  BANKING 


\ 


It  is  believed  fair  and  cotiMTvative  to  conchulc  that  tlicsc  elements 
e<iiiali/e — it  tliey  do  not  increase — the  proportion  of  war  workers  to  more 
than  id  iier  cent.' 

In  tliL>L'  lacis,  we  liave  an  adequate  explanation  of  the  rise  in 
Cdmiuoilii'v  lifices  uitlmut  ascril)iii<;  it  U>  the  stupidity  of  the 
fiscal  policy  of  the  Treasury,  without  assi^ninj,'  it  to  the  stupidity 
of  the  Ijaiik>  and  witiiout  attributing'  it  to  monetary  depreciation. 

Uut>idc  the  L'nited  States  monetary  dei)reciation  has  been 
substantial  in  many  countries  and  very  j;real  indeed  in  some. 
There  ha-  been  a  colIap^e  in  tlie  value  of  Russian  money  which 
has  sent  prices  to  unheard  of  heights.  Tiie  same  is  true  in 
Austria,  (ierinany  and  Italy,  in  less  def;ree  and  to  no  small  extent 
in  l-'raiice,  as  we  have  found  reason  to  believe.  In  .all  of  these 
countries  tiie  paper  money  has  tlepreciated.  to  greater  or  less 
degree,  below  the  value  of  its  nominal  gold  e(|uivalent.  The 
exteiu  to  wliicli  monetary  depreciation  i>  a  factor  m  Great 
Britain,  however,  can  not  i)e  so  great,  while  in  Canada  the  ele- 
ment of  monetary  depreciation  is  jirobably  very  slight. 

The  table  on  the  following  jiage  ])reseiUs  an  interesting  com- 
parison of  various  index  numliers  covering  not  only  the  United 
States,  liut  (Ireat  iiritain,  (."anada  and  Au-tria.  as  well. 

For  comparison,  the  figures  of  the  Bu'Ictiu  dc  hi  Statistii/uc 
Generate  ilc  In  l-rauec  are  repeated  from  our  chapter  on  French 
prices: 


Ijitire  perioil 
1st  <lii:irtcr    .  . 
Jd  (niart'cr   .  . 
3d  i|iiarti  r  .  . . 
4th  quarter   .  . 


FR.\N(  F. 

1901-1'Jlll' 

ivij  1  vns 
lis  j  ii(> 

vm 

1917 

1918 

1(K) 

258 
>>)7 

,V(I 

1 

.584 

.'•-5 



LN'I  I  i:i)  KlMiDOM 


1901-1910 
1110 


I'm 

lU. 


19  li 
ll'> 


91(, 


1917 


1918 


t'lilin    inrmd   .  .  , 

I-t    1111. [fter 

.M  ipiarter 

■M  i|Uarti  r 181 

4ili  nuarter ^I-' 


2411 
2M) 
■J49 


255 
JtiO 


'  Inderal  I  radt  liifurniatum  .Service.  Wednesday.  f)elober  2.1.  1918.  pane 
1''7  It  is  proper  to  reduce  this  estimate  sirniewlial.  in  that  not  all  of  the 
ra  lwa>  etiiplo\es  are  to  he  o.iinled  as  ilimiK  war  work.  On  ,he  other  hind. 
it    IS    very   rpiestMiialile    if    the   soldiers   have   been    Inlly    replaceil   by    people 

not   tin  \  mu'-K'  e'Ti|l"\t  i| 


THE    UNITED    STATICS 


199 


WHOLESALE  PRICES  IN   THE  UNITED   STATES  AND  CERTAIN 

FOREIGN"  COUNTRIES' 

(Index  numbers  expressed  as  percentages  orthe^indcx  number^ for  \9\3) 

United 


1914 
Jamiarv 
April  .'.  . 

October 

1915 
lamiary 
April 
July     ... 
October 

1916 
January 
April  .'. ., 
July 
October  , 

1917 
January   , 
February 
March 
April 
May 
June 

Jo 

August 
September  . . 
October 
November 
December 
1918 
January 
February 
March 
April 
May 
Intie 


»  Average  for  January  anil  July. 
'  Mnnthly  Labor  Kctmi',  U.   S 
7,  1918. 


^'Onarter  brninninR  in  specified  month, 
bureau   ot    Labor   Statistics,   September 


1' 


200      EFKKCTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND  BANKING 

The  agreement  between  the  two  index  numbers  for  Great 
Britain  is  startlingly  close.  The  divergence  among  American 
index  numbers  is  somewhat  greater,  dibson's  showing  the  great- 
est rise  by  June,  IDLs,  and  Dun's  the  least  increase  by  that 
dale.  The  .\nnalist  inde.x  numlx.'r  is  based  solely  on  foods  and 
is  thus  le.ss  representative  than  the  other  index  numbers.  On 
the  wh'ie.  the  writer  prefers  to  use  the  Bureau  ol  Labor 
Statistics'  index  number,  though  i  moves  more  slowly  than 
Bradstreet's.  and  in  the  chart  which  follows  that  index  is  em- 
ployed. We  may  continue  the  ;able  for  this  index  numlier 
through  July  and  .August;  reaching  I'.ci  in  June,  litis,  it  grows 
to  \U>  in  July  and  to  -'<•:!  in  .\ugusl.' 

Commodity  prices  at  wholesale  in  the  '  'nited  States  have  thus 
doubled  since  the  outbreak  of  the  great  war,  at  the  same  time 
that  the  labor  force  available  for  producing  ordinary  civilian 
goods  and  .service  in  the  United  States  has  been,  as  shown 
above.  practicail\  cut  in  two.  The  writer  attaches  no  sig- 
nificance to  this  fortuitous  exact  coincidence  of  ratios.  Social 
phenomena  rarely  obey  the  law  of  simjjle  (|uantitative  propor- 
tionality between  any  two  factors.  But  the  writer  does  maintain 
that  in  tlie  enormous  reduction  of  available  goods  and  services 
for  civilian  consumption,  we  have  an  a(le(|uate  explanation  of 
the  100  per  cent  rise  in  the  wholesale  commodity  j)rices,  and  that 
no  further  recondite  explanation  based  on  a  "quantity  theory 
of  money  "  is  called  for  as  an  additional  principle 

it  is  not  necessary  for  present  purposes  to  undertake  to  show 
the  relation  between  the  rea.soning  of  tho.se  who  see  the  explana- 
tion of  price  changes  i)rimarily  in  monetary  and  banking  phe- 
nomena, and  the  reasoning  employed  in  the  present  chapter.  In 
part,  the  tw(j  methods  of  reasoning  deal  with  the  same  funda- 
mental factors.  Using  different  language  and  different  modes  of 
presentation.  For  detailed  discussion  and  defense  of  the  theory 
uiuleriying  the  present  chapter,  the  reader  is  referred  to  the 
writer's  I'altic  of  Money. 

'  I  ,1111  infnrtnfd  by  .1  caroful  stiidrnt  in  the  Hiireiu  nt  Latmr  St.itistics, 
who  li.is  w.itclicd  III  rlilail  the  iloimnts  I'lttiriiij!  inlii  llii-  iiidix  iniiidKr,  lliat 
the  riM'  in  iho  Miiiiimr  nf  I'MS  i-.  directly  .ind  obviously  due  primarily  to 
the  iTicrtasc  in  railway  freiKht  rates. 


THE    INITEU    STATES 


201 


We  shall  distinguish  four  ideas  which  have  been  to  a  consid- 
eral.le  extent  confused  in  current  discussion  of  price  changes: 

(a)  A  general  rise  in  prices 

(b)  A  rise  in  commodity  prices  at  wholesale 

(c)  A  rise  in  "cost  of  hving  " 

(d)  A  fall  in  the  value  of  money 

Refore  one  can  assert  that  there  has  been  a  general  nse  m 
prices  one  must  take  account  not  only  of  commodity  prices,  but 
also  of  stocks  an<l  bonds,  real  estate  and  other  long  time  income 
bearers  The  country  has  seen  a  great  rise  in  commodity  prices, 
but  it  has  also  seen  a  fall  in  stocks,  bonds  and  real  estate. 

C.  St  of  living  has  not  risen  as  high  as  commodity  prices  at 
wholesale.    Cost  of  living  is  concerned  with  retail  prices  and  vv.th 
certain  other  items,  as  house  rents,  which  enter  into  the  budget 
of  a  family.     Commonly,  one  has  the  family  of  a  laborer  m 
mind  when  speaking  of  cost  of  living,  which  . , till  further  limits 
the  items  that  will  enter.    Retail  prices  have  risen  much  less  than 
wholesale  prices.    House  and  apartment  rents,  taking  tlie  country 
as  a  whole,  have  risen  little  if  at  all.  and  the  general  nse  in  cost 
of  living  was  estimated  in  the  middle  of  the  summer  ot  I'.'l^  at 
rather  less  than  ;.()  per  cent  by  a  government  official  peculiarly 
qualified  to  give  an  estimate  on  this  point.     The  best  general 
fic^ures  to  be  found  dealing  with  cost  of  living  are  those  pub- 
lished bv  the  United  States  Bureau  of  Labor  Statistics  m  the 
Montl,l{'  Rcvic7,.  covering  the   shipbuilding  distnct.s  ot    New 
York    Philadelphia  and  various  south  .\tlantic  and  Cult  ports. 
A  general  summary  of  these  results  would  in.bcate  sbght  it  any 
nse  in  house  rents  (with  actual  decline  in  many  ot  the  southern 
centers)  down  through  VMl,  witli  a  considerable  nse  in  house 
reiif^  in  a  luin.ber  of  them  during  ItUS,  as  congestion  at  these 
noints  increased.     Satisfactory  general  studies  ot  cost  ot  hvmg, 
however,  covering  the  country  as  a  whole,  have  not  yet  lH..en 

""inder  ordinary  conditions,  a  marked  rise  in  commodity  prices 
,r.,y  be  taken  as  an  index  of  a  fall  in  the  value  of  money.  I  nder 
ordinarv  con.litions  if  the  v.nlue  of  money  is  constant,  the  proba- 
bilities are  that  the  general  average  of  commodities  will  bear  a 


u 


202    i:i-i-i;cTS  ok  tiu-;  war  on  money,  crkdit  and  banking 


V 


fairly  constant  relation  to  nioney.  Some  commodities  may  fall 
in  value  and  conseciuently  in  price,  but  other  commodities  will  be 
likely  to  rise  in  value  and  consequently  in  price,  and,  in  the  great 
avcraj;e,  clian{;;es  on  the  part  of  one  commodity  will  be  ofTset 
by  opposite  chanj^es  on  the  part  of  other  commodities.  It  is 
more  ])rol)al)le  that  three  hundred  conmiodities  will,  on  the  aver- 
aj^e,  remain  stable  in  value  than  that  one  commodity,  gold,  will 
do  ^o.  r.ut  this  reasoning  may  very  well  be  ujjset  by  the  condi- 
tions of  a  great  war.  Commodities  in  general  may  grow  scarce 
and  increase  in  value,  and  under  such  circumstances  a  general  rise 
in  commodity  prices  indicates,  not  a  fall  in  value  of  money,  but 
a  rise  in  the  value  of  goods.  Where  goods  are  as  abundant  for 
ordinary  civilian  consumption  as  they  were  before  1!)14,  they 
have  not  risen  in  price.  Coffee  is  a  case  in  point.  Coffee  sold 
for  i;5  cents  in  i;tl;5:  it  has  sold  for  less  than  0  cents  through 
I'.il.".,  lltKi,  lit  IT  and  the  greater  part  of  litis.  India  rubber 
is  another  illustration.  Ikiuse  and  apartment  rents  would  illus- 
trate the  same  proposition.  In  certain  sections,  like  Washington, 
where  there  has  been  a  great  increase  in  population,  rents  have 
naturally  ri.scn,  and  in  many  growing  cities  there  has  been  some 
tendency  to  a  rise  in  tlie  fall  of  I'.tls,  since  building  operations 
liad  I)een  suspended  for  a  considerable  period  preceding  that. 
There  had  been,  however,  little  if  any  rise  in  house  and  apart- 
ment rents  through  the  country  down  to  the  early  part  of  1918, 
despite  the  check  in  building  operations,  and  in  those  communi- 
ties where  the  population  has  remained  stationary  there  has  been 
no  rise  at  all.  Had  the  rise  in  prices  been  due  to  depreciation 
of  money,  house  and  apartment  rents  would  have  risen  with 
other  prices. 

It  can  not  be  said  that  the  failure  of  rents  to  advance  earlier 
w.i>  due  to  any  inertia  nr  to  a  failure  of  landlords  to  take  quick 
advantage  of  opixirtv.nities.  The  writer  has  made  rather  care- 
ful investigaiion  in  certain  centers,  notably  the  East  Side  of 
New  \'ork,  and  is  assured  '"•  real  estate  men  that  the  situation 
is  a  fluid  one,  that  landlords  arc  quick  to  take  advantage  of 
opi)ortunities  to  increase  their  rents. 

Tliere  has  not  even  been  a  general  rise  in  prices.     What  has 


THE    UNITED    STATES 


203 


happened  rather  is  a  transformation  in  the  price  system,  under 
which  certain  prices  have  risen  and  otlier  prices  have  fallen. 
Labor  and  its  current  products,  scarce  and  dear,  have  risen 
markedly  under  the  pressure  of  war  demands;  stocks,  honds  and 
real  estate  and  other  long  time  income  bearers  have  fallen  dras- 
tically, as  men  and  governments  have  sacrificed  them  to  obtain 
the  vitally  needed  present  goods.  The  future  has  been  ruthlessly 
sacrificed  to  the  present.  Coming  with  this  change,  and  part  and 
parcel  of  it,  has  come  a  marked  rise  in  the  long  time  rate  of 
interest,  symptomatic  of  the  emphasis  on  the  present  and  the 
discount  on  the  future.  These  three  changes:  (1)  a  rise  in 
present  goods  and  services;  (l')  a  fall  in  long  time  income 
bearers;  and  (,3)  a  rise  in  the  long  time  interest  rale,  are  merely 
different  aspects  of  the  same  general  lundameiual  fact. 

In  the  midst  of  these  changes,  gold  has  remained  fairly  stable 
in  value,  and  has  proved  itself  a  good  measure  of  values,  an 
accurate  monetary  yardstick.  It  has  correctly  registered  the  rise 
in  present  goods  and  services;  it  has  correctly  registered  the  fall 
in  long  time  income  Ijearers.  We  may  picture  the  situation  by 
the  figure  of  a  seesaw,  at  one  end  of  which  are  placed  labor  and 
commodities  currently  produced,  at  the  other  end,  stocks,  bonds 
and  real  estate,  while  gold  stands  at  the  center.  In  IDU  our 
seesaw  was  in  equilibrium.  The  war  has  tilted  the  plank,  raising 
lalxjr  and  commodities  and  depressing  stocks  and  bonds.  Gold 
stands  in  the  center,  where  it  stood  before,  sujjstantially  un- 
changed in  value. 

The  United  States  have  gained,  as  we  have  seen,  over  a  billion 
dollars  in  gold  during  the  war.  Under  ordinary  conditions,  such 
an  increase  in  the  gold  of  the  country,  if  expected  to  be  perma- 
nent, would  lead  to  a  great  decline  in  the  value  t)f  gold.  But  the 
conditifjns  are  extraordinary.  Emergencies  of  the  war  have  led. 
as  we  saw  in  an  introductory  chapter  of  this  monograph,  to  a 
greatly  increased  significance  of  one  function  of  gold,  namely, 
the  "  bearer  of  options  "  function.  Ready  geld,  the  one  sure 
li(iuid  asset  to  which  men  can  always  turn  in  times  of  stress  and 
emergenc\-.  has  been  more  eagerly  sought  for  during  the  war 
than  in  the  years  preceding.    The  increased  value  coming  to  gold 


204    i;i-i  i;crs  ok  tul;  war  un  money,  credit  am>  banking 


M' 


trom  this  war  time  cause,  lias  oH'-ct  tlie  tendency  to  decline  in  tlie 
value  <il  j;oId  in  the  United  Slates,  caused  l)\  the  increased 
quantity  of  .yold. 

Parenthetically,  it  may  he  noticed  that  price  changes  in  dif- 
ferent ])arts  of  liie  world  seem  to  ha\e  had  no  close  coiniection 
uilli  tile  actual  nuivenients  of  i;i>id.  (iold  came  to  tiie  I'nited 
St.ites  and  prices  rose  in  liie  Lnited  States,  Init  jrold  left  Kni;- 
laiid  and  l"r:ince,  and  jirices  ri)-.e  in  those  countries  even  more. 
The  effort  to  work  ont  any  definite  correlation  between  s^old  and 
])rices  on  the  liasis  of  "  normal  laws"  in  these  wholly  abnormal 
times  a|)]K'ar^  to  the  present  writer  to  he  futile. 

Viewed  in  fundamental.  i)syclioloijical  terms,  the  rise  in  tlie 
values  of  labor  and  commodities  is  inevitable  under  such  condi- 
tions as  we  liave  had.  In  tlie  (irst  place,  as  we  have  seen,  they 
have  i^rown  scarce.  In  tlie  second  ])]ace,  they  have  attained  an 
unusual  sij^niticance  owin<j  to  tlie  intensity  of  our  concern  o\er 
tile  outcome  of  the  war.  .All  tiie  ideal  values  of  our  civilization, 
dependent  on  tiie  outcome  of  tlie  war,  have  attached  themselves 
to  the  inuns  and  cannon,  powder  and  shells,  food  stuffs,  c.irriers 
and  otiier  tiiini^s.  an  abundimt  supply  of  wiiich  is  essential  to  the 
winning;  of  tiic  war.  .Xnd  all  liie  economic  vrdues  that  men  and 
nations  could  command  in  tiie  future,  ordinarily  largely  dor- 
mant in  their  intluence  at  present  market  values,  have  been 
i)rought  in  to  reinforce  the  values  of  these  vitally  necessary 
])resent  goods. 

To  these  fundaniental  clianges  in  tiie  technological  and  psy- 
chological factors,  money,  l);u!kiiu'  .and  puiilic  tinance  have  ad- 
justed ihemselves,  l)ank  credit  has  exp.mded  as  it  has  lieen 
necessary  to  accomi)lisit  tlie  transforni;itions,  and  as  ])rices  have 
risen,  .\fter  tlie  war,  wiien  commodity  prices  and  wages  come 
down  ag.Liii — as  tiiey  iiK\  it.iliiy  will  in  terms  of  gold — bank 
expansion  will  .al-o  diminish.' 


'  Nil  (lisciissiiiii  lit  jirun-  li\iiiu;  i-,  pivi'ii  in  tlii-  (.liaptir.  a>i  tin-  matter  is 
tcj  lie  di'.Tti  uitli  ill  ili'l;iil  in  :i:,ntlur  miPiMjirapli  in  tin-  iirc-fiit  M-riis.  I'ide 
tile  |it(-(iii  writir's  |i.i]icr  "  \  .ilnc  ami  I'rux'  I  Iit-ory  in  Ivi-latinn  to  Price 
I'ivHii;  and  War  I'inanct.  '  .■liiuriciin  i.cunamic  A'ciiVu',  Supplimcnt,  March, 
l"18 


TIIF.    I'NTTF.D    STATES 


20.'. 


CoMMonrrits  ani>  Sixlrities 


The  story  of  price  chanj^es  in  tlie  United  States  is  not  complete 
without  an  account  ot  the  course  of  tlie  itock  market.  The 
followinj;  chart  exliihits  the  relation  of  stock  prices  to  com- 
modity prices  (hiring;  tiie  war. 

It  will  he  oljserved  that  stock  ])rices  fell  sharply  where  com- 
modity prices  chanji;ed  liule  at  the  outi)reak  of  the  war:  tliat 
stock  prices  reco\ere(l  markedls'  and  rose  hi^h  in  I'.tl."),  heldre 
the  movement  of  commndity  prices  got  well  under  way:  that 
bcfjinninji  with  Xovemlier.  r.>lti,  at  a  time  when  commoility 
prices  had  still  made  only  a  nindcrate  rise,  stock  prices  l)egan 
their  f^reat  and  drastic  fall,  during  which  comnioiiii)  ^rices 
soared  U>  new  and  unheard  <if  levels.'  The  two  linc^  cr(,sscd  in 
our  diagram  of  .April,  lUlT.  It  will  lie  ol^erved  that  while  com- 
niixlity  prices  start  on  a  base  ni  lot)  jier  cent  in  January,  I'.U  1. 
stock  prices  start  at  the  actual  average  figure  of  the  fifty  stocks 
clii  sen.  It  will  he  noticed  too  that  the  scale  fur  st^  ck  ])rices, 
indicated  in  our  first  vertical  column  of  figures,  is  twice  that  of 
commotlit}'  prices.  The  stock  j)rices  run  in  terms  of  actual 
dollars  i)er  share;  the  commodity  prices  run  in  terms  of  per- 
centages of  I'.M:!  prices. 

A  nil  re  detailed  picture  of  the  course  of  stock  prices  during  the 
war  is  given  in  our  second  chart,  which  distinguishes  bonds, 
railroad  stocks  and  industrial  stocks,  giving  also  the  combmed 
curve  for  rails  and  industrials.  The  scale  of  this  chart  is  onlv 
half  that  of  the  curve  for  stock  prices  in  the  preceding  diagram. 

Following  the  sharp  dro])  in  stock  prices  at  the  outbreak  of 
the  war  and  the  closing  of  the  stock  exchange,  there  are  no 
quotations  of  significance  to  be  had  until  the  stock  exchange 
opened   again   in   Xovember   for  bonds,  and   in    December    for 


11 


'The  Kriat  rist  from  .August.  1916.  to  June,  1917.  in  cotiimoilitv  prices- 
over  sixty  jioints — constitutes  h\  far  tlie  innjor  portion  of  the  rise  for  tlie 
whole  war.  horty  p^  ints  of  this  canie  between  Decemher  ;mil  tune,  the 
shari)e>-l  ri^e  "f  ail  beinii  froin  Marcli  to  .\l.iy.  Much  of  this  <,■a^  a  specu- 
lative rise,  ill  anticip.ition  of  «ar  expeniliture.  All  of  it  pn'r,rtr(l  the  actual 
getting  iinrler  way  of  the  main  financinl  operations  of  the  United  States 
Government. 


2<>i!      KFIF.CTS  OK  TIIK  VV.\R   ()\    MONEY,   CREOIT   .WD   H.WKIN'G 


h' 


r- 

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—COMMODITY  PRICES. 

(BUREAU  OF  LABOR  STATISTICS 
INDEX  NUMBER.) 

(  ANNALIST'S  LIST  OF  25  RAILS 
ANO  25  INDUSTRIALS.  CLOSINQ 
PRICES  OF  EACH  MONTH.) 

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THE    UNITED    STATES 


207 


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25  INDUSTRIALS 

COMBINED  RAIL3  AND  IKO 

— 

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5 

i 


20S      EI-KKCIS   or    llli:    WAU   on    MOM.V,    CUKDIT    and    1!AXKING 


>tocKs.  ] 'rices  rciiiaincd  low  until  .May,  r.'l.j.  wlu'u  tluTc  began 
an  e\tra(ir(linar\  ri>e  in  tiie  indu.-irial  list,  chietly  c^mnected  with 
the  "  war  lialiie>,"  or  stocks  oi  coriiorations  wiiich  were  bene- 
lici.iries  ol  the  l-.tirnpean  demand  lnr  nuniitinns  and  war  su])- 
])he-.  AniiMit;  these  were  i'.utte  ;ind  .'^n])erior,  whose  shares  rose 
early  on  the  threat  demand  for  zinc,  \\  e-~tini;house  bllectric  and, 
niMst  CMi:.|,ieii,iiis  <o"  all,  Itetheleheni  Steel.  The  jjrice  nf  the 
ii  iu-iri,iK  cins^iii  the  jirice  ol"  the  r.ails  i,i  June.  l',il.".,  .and  the 
St  .1-1;  e\ch.i;i'_;c  ilrilled  with  the  excitemem  nf  l're(|nent  million 
sh.ie  li.is^  \i'V  a  |iri'lnnM;ed  period.  Thnut;h  the  crest  td.  this 
ciir\e  w:i-  readied  in  (  ictnber,  ureat  activit\'  CMntiniied  throuj;"h 
the  year,  and  I)ecenil)er  :!l,  r.M.'i.  mi  wliicli  d.iy  .\n>tria's  note 
te  the  President  accediii;;  ti'  ;in  nltiinalnm  li\-  the  I'nited  St.ates 
\\;i-  ri'ci'ixed,  was  ,i  million  --h.are  d.i\-  with  Mib-^t.antial  j,';iins  in 
many  ^ecnrilie-.  notably  .Mexicm  PelniU-uin,  In  the  ])hr,ise  of 
ciHe  liabitiic  I'f  the  ticker,  l'.i|."i  went  oiii  in  .1  "  bl.aze  i>i  j:;li)ry." 
The  \e.ir  lvi.">  ;il-.>  s.iw  a  -■nb-t;iniial  ris^  in  the  r.iiK.  The  '>e;irs 
cnntrnlled  the  in.irkit  ihrdU'li  the  earlier  niuiiths  of  llMH,  and 
there  w..-  a  >li,!r|i  ilmji  in  Ajiril  ui'  that  year  ii\er  the  pruspeci 
III"  w.ar  with  (ifrni.my,  at  the  time  ol"  the  sinking  of  the  Siissi.v. 
riie  (ierman  a>>nr,ince  of  ces  .atioii  of  illei,;al  submarine  activities 
re-^tiired  coiuideiice  in  some  inea-iire,  .md  after  ;i  few  more 
month-  of  u,Tm  in  a  risi'  bcjan  in  Jiilv  iindei'  the  leadership  li 
riiited  St.ites  Sleil,  uiiich  carried  the  mdusiri.il  list  and  the 
whole  list  t..  the  biub  peak  of  tlu-  war  in  .\'  \ember.  I'.M»>.  In 
the  Course  of  this  mo\e.  <  ieiier.il  Motors  went  to  its  dizzy  high 
of  .tHno  a  sh.are. 

.\  substantial  rise  in  the  rails  dnrmi;  r.»lt>  also  took  ])lace  under 
the  intUieiice  of  great  iiicre.ise  in  both  their  gr.is^  and  their  net 
earnings.  Hy  (  )ciober,  I'.'lti,  however,  it  had  become  clear  to 
careful  students  of  the  railroads  that  ex])enses  of  oper.itiou  were 
growing  as  rapidlv  as  gros,  receipts,  th,it  they  wmild  soon  be 
outrunning  them,  and  that  a  deiline  in  net  resenucs  of  ilie  rail- 
roads wao  in  early  prospect.  This  did  take  iikice.  except  for 
Soiiiliern  I'acilic  and  one  or  two  other  fortunately  .situated  rail- 
roads, b\   the  end  of  the  _\ear. 

In  heceinlrr,  liMtl,  rumors  of  peace  led  to  ,1  sharp  bn-ak  iti 


TH1-:    rS'ITKD   STATICS 


209 


the  price  of  all  -tocks,  while  nwiidrs  of  the  entrance  of  the 
I'nited  States  into  the  war  led  to  a  further  drastic  decline,  and 
the  end  of  the  year  saw  stocks  lower  l)y  far  than  they  had  been 
at  the  Iic'^nininu  of  the  year.  I'.arly  in  \'.i\7.  the  renewal  of 
(ierniany'.s  Milmiariiie  waruire  and  tiie  dipkimitic  break  of  tJie 
I'nited  States  with  ( rerniany  led  to  new  low  levels. 

The  day  on  wliich  .\nil)assador  I'.ernstorff  was  sent  home  pre- 
sented a  particularly  dramatic  episode  in  the  stock  market.  .\!1 
securities  fell  heavily  uutil  >uddenly  the  new.»^  ticker  amiounced 
that  the  IVesidetu  iiad  liatided  tiermany's  ambassador  his  pass- 
l)orts.  Instantly,  tlaL;>  flew  out  throu^diont  the  tinancial  districts 
in  New  \'ork  and  lioston  and  in  other  centers,  while  bidding  for 
all  seciiritie>  bei;an.  It  lifteil  tlie  j^eneral  list  two  points  or  more 
abo.e  the  low  for  the  day,  and  lifted  many  securities  eij,dit  or 
ten  |)oints  above  their  low  price  for  the  day.  It  was  the  stock 
ni;irkel's  method  of  ,u;ivin.i;  e\i)res>ion  to  its  patriotism  and  its 
contidence  in  the  success  and  rijjhteousness  of  the  American 
cause. 

I'"or  some  months  follow  uil;  the  di.smis.sal  of  the  (ierman  am 
bassador,  tliere  was  reco\er\  in  the  industrials,  thout,di  the  rails 
coinimied  to  .-a-.;,  but  by  June,  I'.MT,  as  the  market  began  to 
realize  the  drastic  tax.ition  and  hea\y  bond  issues  that  were  com- 
iiiL;  and  the  fundaiU'Htai  re.id  justments  that  were  to  be  gone 
through  with,  all  kinds  of  securities  fell,  and  fell  heavily.  The 
climax  was  reached  in  I  )eceinber,  I'.MT. 

The  course  of  the  rail>  through  HUT  is  probably  as  significant 
as  any  t)lher  feature  of  the  market,  although  lhind>  also  took  the 
same  cour.se.  With  rates  fixed  under  legal  control  and  with  costs 
mounting,  the  railroads  of  the  country  were  in  a  des])erate  plight. 
I'y  l)eceml)er,  their  cre<lit  was  in  a  very  ini fortunate  condition 
and  -ailroad  prices  seemed  to  have  no  bottom.  .\  speech  of 
"i  .iient  Wilson  to  Congress  in  I)ecemlK.T,  I'.'IT,  announcing 
t.  ..>  -Jie  government  would  take  over  the  railroads  on  favorable 
terms,  primarily  for  the  purpose  of  ])rotecting  their  credit, 
though  also  for  the  purpose  of  enabling  them  to  be  utilized  more 
ciTectively  for  the  vv.ir  emergency,  explains  the  sharp  rise  indi- 
cated in  our  stock  curves  at  that  time. 


ilO      EFFICCTS  OF  THE  WAR  ON    MONEY,   CREDIT   AND   BANKING 

In  l!"!^  Stocks  rose  during  the  early  niontlis,  were  depressed 
m  Marcli.  April  and  May  under  the  inlluence  of  the  terrible 
(lernian  drive,  and  snlisoqueutly  rose  fairly  steadily  to  the  end 
of  October,  discounting,'  successful  peace.  The  increase  of  rail- 
way rates  in  I'.Ms  explains  one  substantial  sharp  movement  in 
the  railway  cur\e. 

The  decline  of  bond  prices  from  a  his,di  of  !»<>  in  December, 
lit  HI,  to  a  low  of  >n  in  Sei)teniber,  lit  IT,  is  significant  of  the 
growing  scarcity  of  cai)ital  and  the  rise  in  long  time  interest 
rates.  This  factor  is  stnmgly  evidenced  in  the  prices  of  all 
securities,  especially  the  rails  and  i)referrcd  stocks  of  all  kinds. 
In  the  case  of  the  bond  list,  however,  it  constitutes  virtually  the 
whole  explanation  of  their  course  from  the  beginning  of  11)17. 


APPENDIX 


; 


AFPKXDIX 

LONDON-  STOCK  liXCHAXGE  \-ALUES  ' 

(111  thousands  of  pounds  sterling) 


2ia 


British 

;iM.l 

Indian 

l-iimls. 

I  I'ar 

I     \'alup 

i_H6.>,7S6i 

Dec.    IH,  I'Jl.rr.    65X^48" 
Jail     20,  l'»I4...    ()7,i.S20 
IVti.    .'0,  1<)14...    09,i.84S 
Mar.  .'(),  1914..  .    (>H>J2l 
Apr,    .'(),  1914...    6H,S.616 

M;iv   .'0,  1914...  6,S.i,4.=;2 
JjiiR-  20.  1914...    0X4.499 

Jiilv    20,  1914...  (mj-is 

Jiil.v    Ml  \')U\.  04M01 

Jan.    20,  191.S...  ().!2.188 

Feb.    19.  191.S...  ().>2.4(l() 

Mar.  20,  191.v..  016,812 

Apr.    20.  191.S...  015,88,! 

Mav   20,  1915...  ol5„!00 

JiMu-  21.  1915...  014.9M 

July    19,  1915...  O0.5..57.1 

Auk.  -1.  1915...  002,8.U 

.Sept.  21,  1915...  002.8,U 

Oct.    21,  1915.    .  003,778 

N'ov.   19,  1915...  00,!,010 

Dec.    17.  1915...  579.527 

Feb.    21.  V)\(,^..  577 .U4 

Mar.  21,  1916...  571.247 

Apr.    19.  1916,..  570.0,U 

Mav    19,  l<M(i.  ..  ,5o9.78.? 

June  21,  1910...  581.4.?0 

Jiilv    21,  1916...  558..i51 

AiiR.    19,  1916.  . .  557,208 

.Sept.  20,  1916.    .  .561.4.W 

Oct.    20.  1910...  542  840 

Xnv.  20,  1916,..  .>29  44,i 

Dec.    18,  1916... j  .-20.141   i 

Jan.     >J,  1917...  51.?,02.<  I 

Feb.    19,  1917.  ..I  504  915  '. 

.*'ar.  20.  1917...  51.!  8 '5  ' 

.\pr.   21,  1917...  520.402 

Mav   21,  1917...  |!25,470 

June  21.  1917...  524.(M7 

Jiilv    20.  1917..,^  .528.009 

\iiir.  2(1,  1917...  529.017 

Sept.  20.  1917, ..  .52,!,!';7 

<\\.    20.  1917..,:  5.(0.6. 0 

Xiiv.  17,  1917,..!  525  14.! 

D.v.    17,  1917...  .520,.'81 

la  ■      18.   1918...  519  984 

I'cb.    18.  1918.  .,  517  048 

.Mar.    18,   1018...^  510  879 

\ur.    IS.   1918,  ,.  5;4  8"0 

Mav    r.  1918...  524  2!8 

June  19,  1918., .  525  054 

»  Slock  cxrhancp  rln«nl, 

"  X'.'tlllrs    fftr    Tnnlinrv    tint 

'  I  r.ndtiti   l!,iiil.-,-r.i'    l/in.'ii.- 
valuer  ot  the  i-   m^,  nllur 


2b 

Hritivh 

Ky,    Ord, 

i    Stiicks, 

(Par 

'     X'aliu' 

Jlo,7so) 

■  27 1.69.i 
278,940 
286,577 
276,145 
27.!,798 
209,149 
209,(),!2 
209,513 
255,866 
254,422 
251,255 
24,i  .■i82 
24,1,227 
241,503 
237,024 
220,(X)9 
216,635 
216,635 
211,910 
214..195 
216,0,!0 
2l6,K(;i 
213.050 
213,110 
216,354 
225,412 
228.295 
227.803 
217,.^20 
208.f.81 
205.856 
204.078 

205.893 
207.!06 
204.5.50 
207.108 
202.5.12 
20.!.0W) 
20fi,809 
204.411 
l'i7,97o 
2'il,12o 
198,716 
195  203 

200  131 
I'Kif,-; 
187  rro 
1 8'  .■'"2 

i.w'mo 

113  876 


'4 
ISriti>^h 
Hank 
Shares. 
(I'ar 
N'aluc 
-'9.JJ8) 

178,1,!9 
180,050 
180.O25 
179.484 
181.167 
181. o/O 
182,195 
182.6.^0 
177.514 
175.824 
174,7.56 
172.8.U 
173,478 
173,10/ 
170.684 
163.949 
156,783 
150.783 
154,987 
157,222 
159,537 

1.58,013 

i.so.8.=;o 

159.055 
100,211 
1()4.()59 
lf)4,013 
163,094 
l(>2.2,i0 
101,425 
l(i0,805 
161.3,-') 

161.077 
1,58.931 
158.003 
161, .!64 
lol.,M7 
162.400 
102  002 
lol  444 
161,823 
162.027 
162,881 
163,023 

161!  C87 
1(.s904 

16«;513 

lo5.(.ol 
167.181 
167,640 


JS 
t-uiniTi. 

In.l. 

Shares. 

(I'ar 

\alue 

36,701) 

~8 1.2.59 
83,942 
85,683 
84,081 
84,063 
83,236 
83,244 
81, (.62 
77,063 
69.954 
69.548 
68.837 
69.100 
68,351 
66.684 
60.804 
57.883 
57.883 
57,537 
59.008 
60.326 
63,501 
61.617 
61.890 
62.119 
67  465 
72.3.!2 
71.756 
70.789 
66.644 
68.954 
67.781 
6f..61I 
66.68.i 
67.807 
68..i92 
68.041 

70.441 
70  808 
70.405 
70.0(0 
71.045 
71.64^ 

72n«7 

7246') 

60,701 

68.189   ' 

67,8"6 

60,446 


hja:: 


Shipping 

Sllares. 

(Par 

\'atu( 

7.J00) 


14,022 
14,165 
14,577 
14,.!51 
14,355 
14..52() 
14,-543 
14,546 
13,604 

14,.:52 
14.011 
14,I0() 
14,831 
14,388 
14.05') 
13,818 
14,613 
14.013 
14.(08 
15,2'»9 
15,809 

16,035 
10,199 
10.985 
18,  U4 
18.812 
19.200 
19.S74 
19.818 
11.685 
20.012 
19,709 

18.801 
19,007 
18<)'.4 
19017 
19,08.! 
19,')<)9 
20.541 
20,410 

20  l')o 
20,7')  1 

21  120 
2 ',440 

23  018 
22820 
23,691 

22  .'51 
22!470 
22,745 


15 

South 

.Afri;an 

Mines, 

etc. 

(Par 

\'aiv.e 
^0,704) 

56.434 
58,964 
56,216 
58,680 
55,877 
55.104 
55.458 
45.699 
41  M,2 
40.63 1 
41.815 
45.189 
43.205 
4',2.!0 
40,830 
39.74) 
.19.744 
39,157 
41,1.!5 
41,131 

40.220 
40.126 
39.472 
38.788 
41,870 
41,147 
43.144 
44.005 
44.455 
44.617 
43.'),!') 

45..!01 
43.712 
44.583 
44.0,!o 
45,412 
45,<)')5 
45,037 
44  443 
45,900 
4o..!41 
A  1  -.-8 
43.7)0 

44  378 
44.(Ki6 
44,021 
41.221 
4.!,7(I5 
45,5.16 


Total   ot 
al!  Si- 

curitifs, 
(  P.ir 
X'aluc 

3,4-M.586) 

3..!4 1,085 
3,389,478 
3,455,452 
3,4(17,840 
3,406,191 
3,385,562 
3.383,128 
3,370,709 
3,182,717 
3,114.027 
3,0<)2,243 
3,017,000 
3,052,<»6 
3,025.592 
3,008,578 
2,90<),989 
2,907,091 
2,90^,0,32 
2,925,6')8 
2.9(j8.459 
2,907,281 

:  2,888,559 

2,862,454 
2,855,386 
2,8,i8.<.>89 
2,912,.=i01 
2,8<)3,182 
2,898,496 
2,8«)0„!90 
2,8!  1,082 
2,797,782 
2,758,.!4g 

2,746,793 
2,(.-2,.!88 
2.00').377 
2. 71,!. 005 
2,710.405 
2.71 7.31  r. 
2,721)1)9' 
2.72'!  19,? 
2.690  .!37 
2,688,395 
2.6,!4.6.!3 
2.000.65.1 

2.622.516 
2,619,780 
2,.'i92  2IS 
2.571,612 
2,614„194 
2.633,824 


)i.-.     Tlie  llaiik.vs'   ^!,uia:iii:-  tiRures  arc  for  tlie  totil 
than  for  prices  per  share. 


>.u 


APPENDIX 


PRICKS  OK  BRITISH  W  AK  LOANS  ' 


Jan. 

Mar. 

Ai.r. 
May 
June 

Jan. 

Mar. 

May 

June 

July 

Auk. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Fel>, 

Mar. 

Apr. 

May 

June 

July 

Aui;. 
Scin. 
Oct. 
Nov. 
Dec. 


JS. 
2X. 
-5, 
30, 
2/", 

Ml 


i4. 

2'). 

2(>. 

.51. 

2X. 

2.1 

30. 

31, 

2'). 
2(). 
25. 
2'>. 
27, 
24. 
29, 
2'), 
30, 
2S. 
25, 
30, 


Jan.  27 

Feb.  24 

Mar.  ,M 

Apr.  27 

May  2'i 

June  3(', 

July  26 

.■\ii«.  25 

Sci,t.  20 

Oct.  2(> 

Nr,v.  30 

Dec.  2^1. 


Ian. 
Fell. 
Mar 

Apr. 
May 
Tune 


26. 
2S 
27, 
26 
31. 
20 


014. 

014. 

014. 

014. 

014 

914 

015 

015. 

015. 

915. 

015. 

915. 

915. 

015. 

015. 

015. 

015. 

915. 


016. 
016. 
OK.. 
016. 
016. 
Old. 
016. 
OK), 
016. 
Olh. 
OK). 
016. 


917,. 

917.. 

917.. 

017. 

917.. 

917,. 

917.. 

917.. 

917.. 

917, 

017.. 

917.. 

91S.. 

018., 

018., 

018., 

018. 

OlS 


3'-y, 

19.5-28 


41.V, 
lOJ.S-45 


i'.c 
1929-47 


19J9-42 


04"  „i 
94Vi,. 
94'h,i 
9-i\ 

93-H 

02-s 

92\ 

92',,, 

92-U 

SO'H 

891^ 


861 , 
85's 
87 
87'4 

8rf; 


9714 

98 

07»i., 

08' s 

or'Ho 
971^4 


89-'l'. 

96i>';,., 

88' s 

97 

87'4 

06% 

fy^'s 

96"'„1 

88:t, 

95  Is 

89', 

961  ,„ 

88 

05'rH„ 

8(.i.'. 

9(.-V 

85". 

94'i, 

84', 

95'^. 

83'.'. 

95 IV, 

85', 

96' 

85'i,      , 

wi-4 

84'A 

K9''l, 

S.vi, 

9.", 

87 

91'/, 

87 

9]\ 

86^1, 

94 

87' {. 

9J1/, 

87'', 

97'H 

86I4 

101 

85i« 

QQlv, 

85«4 

99'/. 

85 

99'A 

007; 

IflOf'; 

loo-i; 

991^, 

9QS: 


947; 

99' C, 

94 

100'.'. 

94''i 

KK)'/, 

941^ 

ini 

94'^. 

102 

94'<'. 

10.>-il 

94', 

100 

93"i„ 

9914 

93'->i„ 

1 00-14 

93'v,„ 

101 

9.V1; 

loiu, 

031, 

10_' 

93v 

lOO'l 

931s 

93'''i„ 

931^,.; 


100-v, 
101^4 
10814 


Co  .N  SOLS 


/3','4-/0 

751-^-76 
75'4-7.Vi4 

74'v74's 

7A'\-7i\H 

68'.'. 

68'<j 

6(i''i.i 

66''j,i 

66!',,, 

65 

65 

65Vi,! 

65 

65',,, 

60 

58!ij 

591-4 

581m 
5714 
57ii 
575^. 
S9V4 
50i<i 
59  " 
59a4 
561-4 
55% 

55y4 

51-H 
52 

5.5'i 

55 

5514 

5414 

55:^ 

56i<, 

54"; 

561 4 

56 

5414 

54^, 
54'^, 

54-ii; 

55^ 
56-H, 
56 


"  Stock  exchaiiRc  cln.se'l. 
'  London  Frniwinist. 


APPENDIX 


211 


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INDEX 


Accriitanccs — see  Hills  of  exchange. 

AMiicli Arccland    Act.    UK    l.'.O,    l.M.    I*;5. 

Allies,  'I'lu- :  iiuicase  in  Anu-ruMn  c\iHtrt>, 
4;  adverse  lialnncc  of  trade,  11;  ntcreas- 
inp  slii|ti;u-Tii-.  of  v;'>ii(i-  irnin  [  'iitt«  d 
State-.    IJ;    loans  hy  L'niteil   St,-^tt■^.    ISO. 

American     National     Monetary    Comnii--ion^ 

;{7.  r.:{. 

Austin.  <).    P.,    inO. 
Austria:   national  hanks,    10. 


federal     re-crve     system, 
e,    C, 


I  rt 
II.'. 


to  Kold.  5; 
3  (t;  con- 
\'i;  I'rancc, 
with. lilt 


I'anlc  crt'dits;  tff(irt<  to  e* 
f  ierniany,  I'rance  .mti 
tractiiMi.  1  1  ;  expaii^ 
2S.  ;l-J,  lOlt-lKt.  l-'*l;  tian-f 
u>e  of  checks,  IJO;  ( iLfnian  ""  niro  sys- 
tem." ."tO;  m  tnne  of  panic,  r»2  54 ;  in- 
crease. I'rance.  tiH;  I'nited  States,  17'.*; 
I'xiiarisiun.  1  S'J-l!»."i;  Trea'siiry  certificates 
of  indebtedness,  I  Mi,  l.s:{;  joan-i  on 
liberty  bonds.  IS.'I;  loans  to  tax  pavers, 
ls;{;  effect  on  prices.  1 S4 ;  nece^-iity  for 
expansion  iliirintj  transition  penoils,  1*<4- 
1H5;  effect  of  loan  policy  of  United 
States,  lH,"i;  control  o\er  extensions.  172- 
174,  I'.Mt-11l4 ;  suhcoininittee  on  money 
rates  of  New  N'ork  liberty  loan  committee 
orsatii/ed,    1114.      See    also   Oedit. 

Bank  notes:  u-age  in  KnRJand,  i-rance  and 
America,  -'.*;  velocity  of  circulation. 
France,  'M:  lioardmK,  in  l-'rance.  4.".  7s. 
Hrt,  11(1,  depreciation  of  I'rench.  7'J,  hii, 
84,  Sr*;  coni|iari>un  between  hat  >  note 
issue  and  deposit  and  check  systv  ,.  Hit- 
90;  issue  of  Itaniiuc  t\o  I'rance.  IKt,  1111; 
rr-  ing  JeRal  limit  of  issue,  table.  111; 
:  of    Hanque    dc    I'Algerie,    111;    of 

f"  .1  reserve  bank  notes.  UV,\;  federal 
reserve  notes  as  ie^al  reserve,  l(l!>,  5"^^ 
also  Currency;    Money;    Paper  money. 

Bank  of  Kngland:  ilepository  at  Ottawa, 
12;  discounted  heavily  foi  London  banks. 
Htt4.  r»a;  all  lawful  demands  for  qold 
paid,  lOrt;  gold  reserve  policy.  171.  I7r>; 
agency  for  federal  reserve  bankr.  17ft; 
gold  in  vault,  bank  notes  in  circulation. 
etc..    since    outbreak    of    the    war,    chart. 

2ir>. 

Rank  of  I'rance — sec  Baiuiuc  de  France. 

Banking  sy-lems:  lack  of  French  statistical 
material,  10;  character  and  operation  of 
French  banks,  l!tL*:i;  contract  between 
French  and  Amenc.in.  111.  '2i  25.  27,  29, 
JU,  .'14,  ri;t-."i4:  Trench  terms  explained, 
20  23;  ccntrali/ itiiui  in  France.  24-20; 
evils  accentuat.  li  by  centrali/alion.  HO, 
ninrketinc  opi  r  ition-;  of  private  banks.  MR; 
testinionv    ot"    otficers   of    Credit    I.yimnais 


as    to    m.irketiticr   operations.    .' 
and  current  .iccnunt  banking.  1 
:^2.   :V.\.   :U:   m    \merica.  :\:\. 
bankini;  in   Cnnda,    France,   ei 
vestments,    loans,    etc..    banks 


deposit 

:io.  31, 

branch 
40;  in 
various 


countries,     40-42;      French     system,     43; 


221 


Tinted  Slates 
Itlo  I7s 
Hank-i;  effurt?i  to  iiicrLa>e  k:.'.d  r 
central.  >uspLirt  v'M  r.di.  inpiioi!,  *..  |(u 
tccted  by  cln-,ing  of  stock  excaiiigt,.-..  .s-tt; 
central,  atd  in  meeting  colLip^e  ot  eiedit 
6>'>tem.  !f;  i--tje  of  enijrKii;c>  currency, 
10-11;  character  of  l-rencli  bank-.  I'.t.  27. 
2S;  re>-enitile  American  liond  lioii,es,  3. 
3S;  nue-tineiit  of  fur  I-.  oN-Ht;  maiui- 
factutniK  emrrpn-e>^  huanced  hv  (lerman. 

40.  4  1  ;  assets  of  Ceri-.ian  ('aiik^  'not  Inp.:  ',, 

41,  French,  heavy  lender-  to  Cemin 
banks  until  H'll.  41-42;  run<  on  I'reneh 
bank-..  44;  -hares  d^cre,-  i-  in  value  on 
l-reneh  exchange.  4o;  recovery  m  shares 
of  l!an(iuc  de  I'rance.  4^.  great  credit 
bou-c'.  of  France,  4o.  4'.*.  ."2.  a^-ets  n.t 
li<iuid.  .~iO;  .\nuTican,  in  time*  of  pantc, 
r»:i;  London  inmt  stock  bank-  curtail 
loans.  53;  cKarinc  house  certilicates  m 
time  of  panic.  .'1;  Rauiiue  ile  IVance, 
10.5-113;  bai  ks  m  I'rance.  114  121.  dif- 
ficulties due  to  niMrat.trium.  54.  55.  122. 
124,  12(!;  hanks  of  [-"r.mce  sup[iorting 
.American  loan.  1 37 :  L'nited  States. 
•  trains  on  cn-h  re-.cr\(..  in  July,  1014. 
150:  ck-arinc  bou-e  certiticates,  150; 
l'nited  -tatos.  legal  reserve.  l«i!t;  State, 
rc-p  tn-e  to  I're-i dent's  appeal  to  join 
fedtral  reserve  sy*-teni,  177;  resources. 
1014  lOIS.  m.-r  S'cc  ,1/vY,  Private  nanks; 
Savings    banks. 

Rati'pie  t]c  I'rance-  note  issue.  10,  22,  24, 
27.  112;  legal  limit  increase.!,  51.  Ill; 
table.  1015-lOISs,  111;  ,.-ue  expamhd  to 
meet  emergencies.  100.  110;  value  of 
notes.  10";  .imount  m  circulation.  lOS; 
Chamber  '*f  (  onimerce  notes  secured  hv 
notes  of,  SM;  credits.  U.  13.  2S,  30,  32, 
33;  plans  fnr  relief  if  I'ar-uiet.  123; 
steady  n-e  in  shares  from  l'.»15,  127; 
r!iart.  12S;  the  great  contral  bank. 
I'rance.  24;  gold  reserve.  2  4.  35.  107- 
lOS,  143;  assets  limited  to  lupiid  item'. 
42:  stops  runs  on  Sorute  (Jeiurr.Ic  hv 
statement  of  bank's  status.  44;  initial 
burden  of  war  on,  45;  selected  items  from 
balance  sheets.  1014-lOlH.  table.  113; 
suspension  of  specie  payments.  ViO;  redi^- 
eoiMiting  for  private  banks,  52,  54.  111. 
12t>;  (lecline  in  moratorium  bills  and  gam 
in  new  bills,  07-«tH;  advantage  taken  of 
moratorium.  S5;  receives  hoanKd  gold 
for  Trea-ury  notes.  SO;  advances  to  the 
Kovernment,  70.  100,  101.  lOS.  100.  112: 
redemption  of  notes,  70;  stiver  reserve, 
S3;  silver  affected  as  legal  tender  by  sus- 
pension  of  gold  payments.  S4 ;  gold 
su()pty  protected.  S7;  attitude  toward  use 
of  checks.  00.  01;  eleatinn  operations. 
01:  heroic  role  during  the  war.  105;  gold 
policy.  105-107:  methods  to  reduce 
State's   debt,    100;   current   accounts   ex- 


222 


INDEX 


|Mn<l<.'<],     I  10;    prctiKiratoriuin    hills,     1 H^ 
III;    a«incy    tor    frilirai    hmtvc    bat1k^, 

i;h. 

ItaiHiut.-    ik-    r  AlniTu- ;    a    liaiik    tif   i«,>uc,    l!7; 

liiint    '*(    11. .tt    i>-.uc    raiM'i.    111. 
Iian>iuc    Natiuiiak-  lic   Crttlii :   cniiit    cxton 

sum-,     lift;    cliaiatlcr.     117;    a-'Stt-*    and 

lial)tlitiL->,  tabk',  111:  hrnctiti-d  hy  popular 

ili-trusl    ">t    KTcat  credit    Imu-'O.    lis. 
Itaii 'uc  di-    I'aris  ct  dcs    I'ay.-lta-'.   I'.').    IJ7. 
llitis  I  f  rxi'iaiu;f:  substitntt-  t'lir  ciirrt-ncy  in 

Iraiicc,  :M.  ;tL';   prolialdc  cffcrt  of  u>f  oi 

fhcrk*    u[t<>ii.    HI. 
BoKart.    K.    L.,    Ui2,    I7i».    IS(» 
Bond    issucs^ji'i-    Itons    dc    la    drfense    na- 

tiiinali';     Lihcrty    loan;     lr(-asur>     ccrtih 

call's  of  uidchti  ints-. 
Hiin->  dc  la  dcfciiM-  natioualc,  M*!.  m7.  J»H. 
Bourse.    Ka  --.I'l'  Stotk   oxih.ink'i'- 
Bullctin    iic    la    Stjttsti<iuc    (,cnir,tlc    ./i*    /j 

/■>jn(»\    71,    7ri.     |im. 

Caissf  dfs  Denols  ct  (■onsiKn.ition-i.  IJt.  liH; 
function,  lr,»;  dipo-its  and  withdrawalb 
of  "«avint?-.  hanks,  |1!»;  l.TlirnciHy  iti-id- 
vent.    ir.i-iJO;  poluy  tti   iiucstnu-nt.    120. 

Call  rates:  New  Vork.  chart.  iri4;  L<indi>n, 
chart.   Iil7. 

Canhof.    M,.   4l* 

raiulil  Is^uc-  f..:nmittjt  of  I'Vd.ral  Kc- 
MTvc    Hoard.    17L'.    UH. 

Capital  l-i>ut'-  (.  'uniniitec  -d  VS'ar  !-inance 
Corporation.      VM .     IHL'. 

Chindire  dc  Compt  ns.ition  di  ■<  ltan<|uicrs  dt 
l'ari>,    .'.4.    Ml.   ',»;t. 

Chart-.  Kold  tn  \.iuU,  hank  n  >t>>  m  circu- 
lati'M.  etc..  Itank  ft  linylaad,  since  out- 
hr  ak  'd  the  w.ir.  'Jlo,  (itrnian  Kcicl>- 
hank  since  the  outhieak  oi  the  war.  'JIH; 
London  market  r.ii  .  -I*!.  I.omloi)  i  all 
rale.  J17;  exehani;  i.iii.s  m  .Nwit/erland 
on    ilerlin    at'  i    \itiui.;.    l*!!'. 

Cliecks ;  use  ni  I-'raiu , ,  *J7.  '\'2\  a-^  crt  dit 
in^ttununt,  "Js  :{0;  u-,-  » neoiir.i«eil.  ri4, 
HS-SO.  IMI.  ctTeet  id  war  npon.  sj,  efforts 
to  increa-*"  n-r  in  pas  r-neiit-.  H**  H!l; 
crossed  check-..  Hit;  attttnde  of  ltan<|ue 
de  IVance.  !tO.  HI;  !,  mslatmn  affectinR. 
HO.  01;  coHectiitn  sy-t-m  inauRurated  hy 
federal    reserve  syxtrni.    1 7*< 

Charnid  hi-UM-:  deposit  creMd  tran-ferred. 
-7 ;  extended  u«*e.  duririi;  war.  01  ;  tnw 
CaisM-  dc  C'onipensitioii.  !»I  Hli;  Cliani'>rc 
dc  Co"n>en-..-»tiMn  dt-*  llanijniers  de  Tans, 
.•4,    01.    0:i:    .eriiheates,    !.".(). 

Cleveland,    (irovcr.    1 74. 

Coil    supply,     l-rance.    77. 

Cotii      v.'e    ("in  n  luy. 

Conmierciat    paper     u\-    Disconnlint;. 

Coinnd'vinns.  rrr.tveti  hy  Knnch  hanks  nn 
_  '^ile    of    siuinti   s.    :t7. 

Conirnodities-  prmv  m  I'raiue  dnrhm  war. 
71  HI;  j>rire-(  ni  the  I'mt-d  M  it-.-s  and 
errlatn  foreign  .  lontrns,  1011;  ihsdnetton 
hrtween  "  eo""Mo  (itv  pricr^  "  and  "  c  >..t 
nf  li\inH."  71  1.NM  :  comnKKlittcs  and 
veearilic-.    JO.'.  Jin. 

Coinpt'dr  dT.-i  "Mi.t.',  J-'.;  tnoliU,  ItU.'l 
T'l  I  III,  iiMr.it  rmin.  11.";  .is-ets  an-l 
Inhihtir^,  ion  101**.  Inhle  1 1((;  iiupp-.it 
MiK    At'i    rte  III    Inrin_    1.'l7. 

Con^eil    Sii|»'f"\ir    dii    Tonrisiiu.    tll» 

("•'nsnnip*i'*n  of  ((...td**  «r*i.  t.  of  tii<  w  ir. 
It  ."»:  (c-nomirs  in.  hv  l-rrnrh  pnlilic,  7*1; 
roal,  Irince  77.  7**;  liixtirit-s.  |-r.inee. 
7H;    hiKh    itrires    in     I  i.mre    not    eiilirrly 


rluc  to,  7>*;  cause  of  increased  prices. 
Iniled  Slates,  150.  I'dO  l!»M.  Sec  also 
l*todiiction. 

Contrc  1'Oii^art.lnc  tinaniUrc  en  France,  3tl. 

Cost  of  liv  my,  ciistiiiKuishcd  frum  general 
commodity    prices.    71.    L'Ol. 

Cotton   exchange,    ITil. 

Couhsse,    I'aris  curb  market,  47,    IliJ,   ll'.'l. 

Credit:  demoralization  of  credit  system,  7- 
.S;  fxtrartrdmaty  remedies.  H-ll;  ad|ust- 
ment  of  trade  halance,  ll-lL*;  govern- 
ment Kuaranty  of  railroad  credit  in  Kng- 
land,  France  and  L'nited  States.  14;  sy^■ 
tern  in  l-rance  hefore  the  war.  ."{.'i;  trade 
halance  adverse  to  France,  '.io.  (iJ,  74. 
I'M;  rehabilitation,  01;  re-ources  of  the 
slate,  40;  (foverninent  cridits  to  promote 
French  shippmK.  tSO-70;  new  credit  nisii- 
lotions  in  (■r.Tnce.  IJl;  ommercial 
failures.  lOOft  1!»|H,  in  Cniie.l  States, 
table.  I.*i2;  ext.-tuh-d  hy  Cniteil  States  to 
foreign  countn.  -,  table.  lo!».  See  also 
Bank    credit. 

Creilit  Foncier:  niorl«aK('  loans,  )lii,  1  JO; 
position  of,  IJO;  profits  and  dividends, 
1010  1017.  121, 

Credit    Industrie!.    "J.*!.    i;i7. 

Credit  Lyonnais;  statemeni,  Dec.  Ill,  10(».*, 
20  J4;  assets,  table,  I'O;  liabilities,  table. 
'2:y.  acceptance-.  32;  great  credit  house. 
2.'t;  testimonv  of  officials  on  marketing 
operatiiHis,  M ;  profits.  I'.tl.'i.  101 1.  114; 
moratorium,  ll."*;  as<tets  and  Jiabililit's, 
1014  lOls.  table,  11.";  suiiporting  Ameri- 
can   loan.    l.'t". 

Currency:  i--.ue  of  emergency,  lil,  deprecia- 
tion, l-ranee,  70.  Hit.  S4.  Mo;  etTects  of 
deiirecial'on  of  greeiihack-,  IMi;;,  ,n 
l'nited  States.  84.  .H.%;  depreciation  tnit- 
Side  of  Cniteil  St.ites,  HtK;  effect  of  the 
war  on  nu-dnun  of  exchantie  in  |-ranee. 
>*2  0J;  estunaie  of  gold  in  circulation,  HJ; 
itisappearaiice  from  circulation,  s'.i; 
er>.;sed  cheek*  as  a  method  of  prevenl- 
i  inflation,  MO;  emergency,  under 
drich\  reeland  .\cl.  10,  l.V).  !.-.|.  !«;.-,; 
silver  cerlHieates  and  <hdlars  rctirtd.  Iti;t; 
inllaiion  a-  c.iu>e  of  ri->iii«  price-,  l!Hi, 
2(H.  202  S,v  iilxo  Bank  notes;  .Money; 
I'nper    money. 

Debt-;  world  unable  to  meet.  7s,  method 
of  pa.  meiit  in  Trance,  20,  ,T1.  See  also 
Puhl-e    .bin-. 

Ihpo-i  -:  c.  nirast  between  France  and 
.\nuri*--.  -;T.  :t:i,  :i4;  made  mobile  with- 
out checks,  ;[2;  hank,  slian  fuiutions  of 
money,  ^(i;  exiiandetl  \v  Manipie  de 
France  to  meet  emirgenrus.  ||<>;  maxi' 
mutn   r.ii-ed   in    I'ranee,    I2i» 

I)eprr-s|  .11  H-e  Ironomic  depression;  Fi- 
nam  ial    d'pie»>*i'tn. 

Ihscotintnu  p.'lu  V  «)f  Frtmh  hank*,  40, 
41;  kn--iin  bilU.  hy  H.mk  of  Kngland, 
i:U.     ,V(V  iilfn   Kedi-eounting. 

nnn's  Hf;iru',   loj. 

Kcimomie  de|irrssinn :  nidusfry  dur in«  thr 
war.  M  Ti;  demoratizaiion  of,  N;  deprr^ivion 
and  **  repri-e  d's  atTiires,"  50  70;  sys* 
ti-iii-  nf  guiding  .nnd  contr-dlim:  produc- 
tion and  eon.itniption.  .'i7**M:  relief 
measure-,  oO  (10.  eon|ra>t  b.lvvem  Trr- 
nnne  and  France,  111:  di-mornli^atinn  nf 
IVenrh  imbi^trv  an<t  trade.  Oil;  {ndu«- 
tries    in    I'rince    atTecle-'    by    f;erinan    In- 


INDEX 


223 


vasion,  04;  labor  situation,  64-00;  prices 
of  cjrtaii)  conimu(litic:>  si^tiihcatit,    t'J. 

Econu  aic  readjustment:  substitution  of 
public  for  private  control,  Irance  and 
Germany,  00-01;  "reprise  des  affaires," 
61,  70;  a  false  economic  philosophy,  01!; 
phases  of  the  doctrine,  OH;  revival  of 
business  in  France,  O;t-0r».  00,  07.  68; 
unemployment,  04-*ir»;  labor  shortage,  64, 
00;    important    deveK)pn)cnts,    OS. 

Economist,  (London),  (luotcd,  21,  .jO,  72, 
r.i,    74,    HIK 

Economistc  Fran^ats.  quoted,  46,  r>4.  63. 

England— Jt*r    (ireat    Britain. 

itlntjland.   Hank  of — see  Hank  of   Kngland. 

Essential     Industrie*     Pinanr^    C  orpnration, 

European    Entente    Allies — sec    Allies.    The. 
Exchange       mediums — see       Hank       notes; 

Checks;   Currency;   Gold;    Money;    Paper 

money;   Silver. 
Expenditures,        government — see        Public 

finance. 

Failures,  commercial.  ltM»0-ll»lH.  table,  ir»l'. 

Federal  reserve  system:  established,  10'); 
condition  at  beginning  of  1U17,  lOr*; 
grnwth,  100;  rediscounting.  lOri-ltJO. 
171;  principal  resources  and  liability 
items  on  selected  dates,  107;  holding''  of 
gold,  lOH,  10'.»;  legal  reserve  of  nKinber 
banks,  amendment  to  act,  l*tt>;  success 
as  tthown  by  ham  1  ling  <>f  liberty  loans, 
170;  golrl  stttltnunt  fund  created  in 
Washington.  171;  daily  settlements  in- 
augurateil.  171;  etficiency  of  substituting 
book  t'-ansfcrs  for  cash  shipmciH"^.  171  ; 
control  of  credits,  17-.  rt-KuLilMin  of 
foreign  exchange  rates,  17-,  17.'i;_^rcstric- 
tioii  of  fortign  ^ild  shipments.  I7J  177; 
effect  iipiin  tntiit  .ibroad,  174;  poltoy 
compared  with  Hank  of  England,  174. 
17."i;  adverse  criticisms,  170;  President's 
appeal  in  l'.tI7  to  State  hanks  and  trust 
companies  to  )oin  system.  177;  agencies 
established  at  homr  and  abroad,  17S; 
check  collection  system.  1 7*<;  vt.itistical 
plans,  17S;  growth  of  demand  d(  pi  wits, 
loans,  ric  ,  f»f  member  hanki.  IMtl;  table. 
1S7 ;  war  ohligatinns  held  by  member 
banks  with  i  arning  assets.  IHti,  INO; 
table.     IHH. 

Figaro.    Tt4. 

Financial  depression :  difficulty  in  financing 
private  enterprise,  1 1 ;  ••talc  aid  in 
I'rance,  14;  causes  brfore  ibr  w;ir,  4.'t-4.'; 
depression  and  "  reprise  de«(  affaires," 
56-70;  international  efforts  to  depress  ex- 
rhange,    00. 

Finot.    lean.    IMl. 

Fisc.il   methoiK-  -  see    Public   finance. 

Foo(|    sup(thes:     l>ance.    70-77 

Foreign  txcbaDgr  New  York  exchange 
rates.  I'J:  international  efforts  to  depress, 
ftt>;  Hatniur  de  Iranie  proticts  Irmch 
exchange,  l(*0;  checks  on  New  York  and 
London  at  di^cunt  in  I'rencli  markets, 
1M:1;  rates  t  irn  against  France,  l.'l.'i; 
agreement  between  France  and  England, 
1.14.  rates  in  Paris  tin  vari<nis  points, 
iniO.  table.  134;  policy  of  Hanque  de 
France,  IHH;  French  short  term  credits 
to  prdlrct.  IMO;  cMllapsc  of  rubles  r  i 
Irench  cxthangc  market,  \'M\.  1^7;  prob- 
lem of  Russian  rxchange.  1J17;  tinanclat 
relations   of    LTniicd    Slates    and    France, 


i;t7.  138;  French  exchange  in  neutral 
markets,  138;  franc  and  pound  sterling 
in  New  York,  138*130;  New  York  syndi- 
cate to  protect  credit,  153;  regulation  of 
rates  by  Federal  Kescrve  Board,  17*J, 
17.'».  174;  course  of  exchange  with  bellig- 
erents, 157,  158.  15l>,  100;  with  neu- 
traLs.  100,  101;  Spain.  161.  102;  South 
.\merica,  161,  Id'^i  rise  in  price  of  i>ilver 
on  countries  with  silver  standard.  10:i; 
shipment  of  silver  by  United  States  in 
settling  foreign  balances.  163;  of  gold, 
12;  rates  in  New  York  of  leading  bcllig* 
ercnts,  157.  15t».  160;  table.  160;  on 
neutral  countries,  100,  161,  162;  table, 
!.%!>;  on  f^iintri^s  'I'ing  ^ttvrr  *t?)"'l3*'d, 
162;  London  stock  exchange  values, 
table,  213;  London  market  rate,  chart. 
216;  London  call  rate,  chart.  217;  rates 
in  Switzerland  on  Berlin  and  Vienna, 
21I>. 

Foreign  trade:  international  trade  during 
war.  3-5;  London,  center  for  interna- 
tional payments.  7-8;  settling  balance  be- 
tween countries,  11-12;  balance  of  inter- 
national payments  in  favor  of  France, 
35;  France  a  creditor  nation,  133;  trade 
balance  adverse  to  France,  35,  62.  74. 
133.  134;  control  by  French  govern- 
ment, 135;  problem  in  making  foreign 
payments.  135;  handling  French  credits 
in  L'liited  States.  137;  net  balances  of 
I'nited  .States  and  method  of  financing 
since  / uly  1 ,  1014.  table,  1 58 ;  rapid 
expansion,  1.56,  157;  rates  to  domestic 
trade.    l'.H0.1f»lK.    157. 

France;  money,  credit  and  hanking,  lf>-42; 
capitalist  nation  at  outbreak  of  war.  35; 
rrivate  banks,  policy  and  marketing  opera- 
tit  ns,  30;  outbreak  of  the  war  in.  43-55; 
pu.dic  debt.  43;  causes  of  depression 
i)eforc  the  war.  43-45;  runs  on  banks, 
44;  hoards  funds.  45;  credit  resources, 
4!>;  assets  of  banks  not  liquid,  4l>..5r>: 
govcrnnicnt  emer^tncy  measures,  50;  de- 
pression and  "  r^nrise  des  affaires."  56- 
70;  creditor  position  early  tn  war,  00, 
133;  contrast  between  France  and  Ger- 
many.  61;  granting  credits  to  promote 
shipping.  0!»-70;  prices  of  commodities 
during  the  war.  71-81;  government  con- 
trol of  supfdirs  and  prices,  73;  effects 
of  the  war  on  the  medium  of  exchange, 
H2  02;  French  f.-cal  methods,  03-104; 
Ranque  de  France.  105-113;  private 
hanks  and  savings  banks,  114-12];  mora- 
torium in,  122120;  Irench  bourse.  127- 
132;  I'rcnch  foreign  trade  and  foreign 
exchange,  1.33  13t»;  ninounts  borrowed 
and  »>ourcf*  of  loans.    135. 

France,   Hank  of — sec  Banque  de  France. 

French    bourse — see    Stock    exchange. 

Germany:  exfMirts  to.  4;  hankers  make  ef- 
forts to  increase  gold  supply,  1012.  6; 
moratoria  ap|»Ited.  0;  legal  tender  notes 
of  loan  bureaus.  I'»;  manufacture  financed 
by  banks.  40;  bank  assets  not  liquid,  41; 
public  debt  of  France  compared  with.  43; 
sub'^Mtulion  of  public  for  private  control. 
60)11;  contrast  between  Germany  ard 
France.  01;  percentage  of  increase  in 
prices.  Ml;  exchange  rates  on  Berlin  and 
\'-i>nna.   chart,    210. 

Gide.    Charles.    H|.    S2.    85. 

G(>td .  disappearance  from  circulation,  7;  in 


224 


INDRX 


Kraiu-t .  M*;  fffort-^  to  i-mirt  hank  cred- 
its into.  ."»fi;  ti«  iiicrta>c  >;oi.|  n.'-t.  rvc, 
I'raiicc  ami  Ki"i»ia.  ♦'•;  'irpnciati.'n  in 
rclati.-n  t.>  lu'c  K!,  sn.  ;;o;i.  Jn4 .  rt- 
'.t.TM-.  I'raiKi.  ;t''.  lii'artUil.  I  rancr.  4.%, 
w",  inti.  inT .  n'litri'l  oi  -tupiiH  nt^.  .'ilt- 
tio[  liMi.  hoMmps  .>f  MaiKjui'  lU-  I  raiicc. 
S*J;  i-tmiatc-l  atimui.t  in  I'raiiL*'.  I1K»S, 
r.ML*.  nn.i  at  outhnak  of  wjr.  SL':  value 
ii|.!iol.U  x.iUif  of  >«ilviT.  >i7;  rcMTvc  of 
Uan-nu-  «K-  I'rancc.  UTi;  namiui-  dc 
l-'ranci-  ■^n-tiu'itd>  pavim-nt,  IHIJ;  (icmand^; 
n:it  liv  Hank  of  Kiislan-i.  UH?;  "  hdd 
abroad  ■*  I>y  liaiiqiic  dc  I'rancc.  I'M*.  I*»7; 
Knuli'-li  d-tctTinr  of  Rold  rf'trvc.  107; 
.uiMiimi.itt.'ti  l>v  llaiKinc  «i»'  Trance.  Hit; 
hv  Kuiopr,  144;  k'old  com.  Kirt:  -.ttua- 
tion  ii,  1014.  I.".;;.  -yri.licaU'  ill  Ncw 
^'ork  fiT  |ii'nhii^.  I't'A;  niiports  and  ex- 
port-. 1-*.  l.'t;!-!.'!.'. ,  call  rate  ill  N'cw 
York,  ctiart.  lo4;  t  xcess  in  l'.tl7.  l.'o; 
incrtasr  a"  rc-nlt  of  fi>r(i^:n  tt.idt  rx 
p.^n^ion.  l."t7;  lioldm^is  ..f  fcdcr.i]  n-^trvc 
baiik^.  Hi7l'»l».  -ittli'incnt  fund  m 
Wa^limnt't"  crtaiid  l>\  fidrral  r<-ii\t 
•-ysldii.  171.  I-miKii  -liipnunts  rc-tiictcd 
hv  IVdcral  K.MTw  ISoard.  17J-17:..  .  f- 
ftct  iit'on  cndit  ahroad^  174;  atminunts 
uRain^.t  piduy.  17.".  I7t»;  (■"-t-ntial  clc- 
nun*  "t  wold  -tandard.  17.*1.  in  vaull. 
Hank  «>f  l.nk'land.  -met:  .mthMik  nt  ilic 
war.  ch.irt,  'Jl.*..  in  \:n:!i.  (Urman 
Rciclish.-.nk.  -incc  outbreak  "f  I  In*  war. 
chart.  '-'IS. 
Great  Itritain :  government  pantt.  in  1 1; 
nieth<tds  ,>i  tinanein.-  the  \*.,'.  11;  «>>v 
ernnieni  iruarantec  of  railr  -sd  «  redit.  14; 
Hank  ..f  l.nkiland.  .-.'t.  Iim'..  174.  K.". 
17H.  ■Jt.'i;  piihhe  debt  '.f  Irancr  a*,  com 
pared    with.    Al\ .    proti-ct'-    Ku'^-'ian    lund'-. 

i:u.  i:*::. 

Cri-li'-n'-    law     of    money    citculatmn.    HM, 
(iuv't,    Vm-.    h1». 


n< 


IhrlMTt. 


Intpot tittinn    of    hixiirii'*     Si'r    l-uxurie"" 
Itiionu-      pi. .fie    "f    l-'ranc     bcl'-rt    th.     wit. 
:in.     iiuMiiK-     (ax,     I  ranee.     44:      Intted 

State*..  1  :>.■*,  1^:;- 

Indn-lne*.  si'r  !.i.ononiiL  deprc--io'i;  l.co- 
vnic    trndiu-tnii  nt. 

Intt  ruatioM.tl    pavnu  iii- — .wr    lorrikri'    tiad_t . 

Iiut  '•tinitit'  ■  itTot  1".  |o  make  li'jind.  .*»  7 ; 
"  T.ntiv."  loiiK  nin<  nhliKatiou'v  "f  IH  nch 
KOMrninent.  lift.  trtllMi;  forei^'n  -leun 
til-  inatk<ted  hy  I  rmch  bank-.  M." ; 
Krencb  MMnB-  put  mHo  fiirriirn  tn\eM 
ment-.  'Mi;  riMitrolU'd  by  ureal  bank-  in 
I'rance.  'AS,  I'd  nrh  bankinu  fnnrU  in 
mcoihI  rale  f-Tt  iun  ^''^i'""'''''  ~  f"'"'- 
tie*.  :t**H!l:  in  tines  of  crtm-  .H'!  ''i 
pre-Mon.    4.'. 

Kitilev.    lVi>id.    I'll.    :il. 

Klol/.      I   M.I-,     f.'.l,      |(HI. 

I.efctal  lendtT  n"tt  -  ■>(  titrnian  I.^an  bnreati*. 
lO;  liH.il  tentbr  pri\il<«r  .J  «i1\(r  franc, 
h'.*;  etTert  of  -  iM„,isinii  .>f  p.^hl  jviv 
ment*  upon  "ih  i  r.  I'ratu  t-.  ^  * :  ^'U  «  r 
coin*.  *<7;  l(  e.ll  t''ide'  iMritiu-\  ttiitr- 
i«.*M'd    tn     I'ratiec.    ^*7.    **" 

I.eroy  lUanliru.    I'anl,    4tl 

U\y.  H.iphatI-<ieornev  :.4.  »»L'.  *»;5    ^l'.  lo(J. 


Liberty  loans:  177;  operation  of  federal 
reserve  hanks  in  handhnti,  170,  171  ; 
total-.     INI. 

I.Ioy.I  (;eor«e.    David,    liil. 

Loan>-:  method  of  protecting  margin  on  col- 
lateral lo.m.  It;  inuiltiajjt  loan  business 
done  by  Credit  I'oncier.  2*1;  doctrine  tliat 
deposits  are  created  by.  \i~,  'VA.  created 
by  deposits.  Kranee.  'A'.i;  policy  of  .\i.,eri 
can  and  I'rench  banks.  4 1  ;  --liort  tune 
p.ipcr  of  for'inii  banks,  held  hy  Trench 
banks,  41  ;  cnrtailerl  by  London  ioint 
stock  hanks.  .".H;  l-rance.  short  term 
treasury  bills.  MM;  Iohl*  tniie  tiovernment 
loan-.  !*'.i-100;  -nh^i  riptioiis  f>  first  nnd 
stcnid  lo.in-.  It*',  tliirtj  atid  fourth  Trench 
loans.  itHt;  retation  of  hank  roiiti>  and 
deposits  to  i'-.r\r-.  110;  lo.ins  to 
I'mnce.  bv  Allies.  1.^.'.;  to  Allie--,  by 
I'rance.  l-'l*!.  tn  \lli«s.  hy  Tnited  Slates. 
Isii;    involved   in   bourse  settlement,    122. 

ij;:.   124. 

l,o?idon  stock  exelian«e:  cour-^  of  rates. 
t  *.'..  ItiO;  Miic.  of  silver,  lt'i2.  H'.a;  issues 
..f  new  sicurities  limited,  llHl  I'.il.  values, 
table.   21  ;i. 

Luxurie>:  importation  checked.  Tnitcd 
Statt.-  and  IVance.  lU.  »t2;  business  duM, 
t>:i;    policv   of    i'rance  as   to   imports.    135. 

I.v-i-,  :ui.  :t7,  42.  120. 

Me  \do...   William   *'nbhs.    I'.M.    I!t4. 
Mituetary   I'om mission.    Anuncan    National, 

Momv:  as  a  "bearer  of  option's"  and 
•*  -lore  of  value."  "».  N'» :  eontinenlat 
Lurope  adopts  a  paper  money  hasi;..  7; 
preference  for  Hard  money.  I'rance.  7; 
reasons  f<ir  preference.  S(i.  effect-  of 
i.bai«e  of  value.  71.  hoarding.  >*•(.  ^'k 
<  "ire-ham's  la«  ft  eiiculation.  s'A,  reason 
tHr  failure  to  etreul.ite  frei  ly.  So.  ScC 
i.'/ao   Mank  Tinte-..  (  uirenc\  ;    l'a)ur  money. 

Moratorium;  apphed  in  KnK'and.  I'rance 
and  (iirmanv,  It;  not  m  I'nite.j  Slates, 
0;  dispensed  with,  lo;  prculaimed  in 
I  tan.,  4.".  r.il.  tAtenilcd  to  nrRotiahle 
n.-trinm  nt-,  .'1  .  advantatic  laken  by 
banks,  o  1  o2.  ."  I ;  <htficutty  of  1->ench 
luiiiks  dm-  to,  .".2.  KiiRtand,  r.;t,  effect  on 
imlustry  ami  bankmn.  o4.  0.%.  moratoria 
•  •T  lufMr^iial  -ubstitut'  -.  ."I'.t.  reaction 
t  r'ttn.  *i'.\ :  lii  i  lim-  ui  bills.  Uiiiicpu  dc 
!t.i!u..  r.illI'.ilH.  lalb.  117  tlK.  rent 
ni'.ratr'rniTM,  |-'rance.  "i'A.  12ri.  private 
Iiank-  -f  I  r  iiiee.  114  11.".,  eontia-t  m 
mi t hods  >>f  -lock  excliantfe  seltlonirnts. 
Paris.  London,  New  York.  122-121*. 
lo.u>-  invnivtd  in  sittlenunt.  122.  12;i, 
121.  in  Prancr.  122  12*1;  plan-  for  rt  • 
lief  "f  Paripiet,  I2M;  moHihcatinn.  l^**. 
12.*.;  premoratorimP  hill-.  IHHU.  12r»; 
Iranee   hampen  d    b\'     1  2*i 

M..ru.in.    .1     P.   and  t -•  .   2:..    IflO. 

Morlnaiie    lo.in-.    2*t. 

National  hank*— i^c  Hank*. 

N'alio'Ml    fhfense   liond-,    France — Jrr    Hon* 

(b'     I.l     defense     tuitiniMir. 

Na'i>oTt  Monetary  Co-m mission:  testimony 
of  ..Hui.iK  ..f  Oe.ht  Lvonnni-*  nn  tnarkrt* 
inir  i'per  iti'Mi'-.  117:   r''T>ort  rpioteiL  TiH, 

New  N'otl.  vt.u  k  rxe!iancr  internal  situs- 
li-m.  14*1  decline  of  fonivn  inw-itment* 
in  \m>,  1  lean  -1  en r  ill-  -  III.  iM.:„ir!  and 
rxp"rt    situation.    14*.    Mo.    -ate    of    %V' 


INDEX 


225 


curities  hy  fortinn  investor-'.  147,  14S; 
c!m»  m  <tt  stock  exchange,  140-141>;  drain 
upon  hank;,  for  cash  reserves,  14'.*,  l.'it); 
emergency  currency  provisions  of  Aldncli- 
N'nelanil  Act  ailopted,  l.'id.  l."il;  cotton 
exchanges,  1,11;  commercial  credit  situa- 
tion,   l.Tii. 

Noble,   H.    G.    S..    141>, 

Noyes,    A.    1).,    U.'!. 

Paries — sec    Stock    citchai^e. 

I'aper  money:  paper  money  basis  adot>ted 
bv  coiitinentai  Kurope,  7;  is'-ue  of  imer- 
gcncv  currency,  Kl-ll.  '.CI;  depreciation 
affects  iirice  of  (told,  IH;  mctallist  tiuory 
of  value,  •"*:(,  S4,  S(*;  Chamber  of  Cim- 
merce  notes,  S8;  L'nitcd  States  Civil  War 
issues,  H4,  '.I.').  183;  basis  for  value.  ITIl- 
174;  flcpreciation  in  forciRn  countries. 
11>S.  Sec  aUo  Rank  notes;  Currency; 
Mnncv. 

Paris    ciirb   market,    47,    \T2,    l'J.3. 

Pans  it  des  Pays-Has,  l)anc|ue  ic—see 
Raiupie  cle    I'ari^   et  dcs    Pays-Bas. 

Pailain.   C.eorges.  HO. 

Parquet,  Paris  otticial  stock  exchange,  122. 
yi:\.   124. 

Picat,    M..    K!l. 

Postal  orders  and  postal  checks  developed 
i.i    l"nnce,   ',H>. 

Prices:  during  the  war,  12-1.'!;  price  fixing, 
,"iK,  .".!>,  7,'t;  of  commodit.es  in  I'rance. 
71-M,  lilt;  ilistiuction  liet«nii  _c.muiiio.1- 
ity  prices  and  cost  of  living,  71  2(11; 
change  ill  prices,  !!•'  1.  lOl.'i.  72.  73; 
gnveriniient  control.  I'rance,  7:i.  prms 
by  ..uarlers,  l'.»Il-191S.  73;  I'.HH-l'.HS, 
V.\H.  l-nited  Kingdom,  IHOI-UMH,  1!»S; 
exjiorts  anil  imports  compared,  1(>14, 
lOH).  Irancc,  74  7."i;  in  l-rancc  .ind 
Great  Kritain,  7."i.  .H'»;  compared.  IIMII- 
lOlH.  t.ible.  7.";  increase,  liiHldlO, 
table,  >>i>;  percentage  of  iiicrcase,  81; 
causes  of  increase,  Krancc,  78,  7!t,  SO; 
Lnited  States,  l.Vi.  r.M>.in8;  div^rsiojl 
of  res.'urces  for  prosecution  of  war.  1!>7- 
21X1;  effect  of  loans  and  expansion  of 
bank  cr  dit  on.  184;  wholesale  commod- 
ity iMices.  Tnited  States  anri  cetl.iir 
foreign  countries,  200;  table.  100:  cost 
of  living.  201  ;  value  of  moiu>.  201.  202; 
real  estate  and  rents.  201,  202.  20,1; 
changes  in,  as  related  to  actual  move 
meiits  of  gold,  20;i,  204;  stock  and  com- 
uiodit\  |iriccs  compared,  20.".  2tMl;  rela- 
tion of  commodities  and  securities.  20."i. 
2111.    Ilrilisli   war   loans.  214. 

Private  banks:  large  amounts  in  deposits 
and  current  accounts.  27.  marketing 
operations  in  l-'rance.  3tl;  testimony  of 
officers  of  Credit  Lyonnais  as  to  market. 
ing  Mpeiations,  37;  timidity  of  I'rench, 
40.  ."2.  ."3.  .*i4;  shrinkage  of  ciep<»sits  r,n(l 
current  accounts.  52;  credit  extensions, 
110;  policy  of  selling  investors  second 
rate  foreign  bonds,  112;  brief  descrifi- 
tion  of  l-"reiich,  114;  use  of  moratorium 
hy.  114  ll.'i,  rj.'!.  12tl;  assets  and  liabili 
lit*  .if  I'rt'-dit  I.\i.nnats.  n.";  C-Mupt.ur 
d'KsconilUe,  110,  .soilele  Ciene'.lli.  110; 
change  m  form  of  statenu  nt*.  110;  de- 
cre.ise  in  acceptances,  117,  118;  assets 
anrI  liabilities  of  Itanipir  Krancaise  pnr 
le  C'unmerce  et  rlndustne,  117,  11N;  of 
Itnn.pie  \ntmnale  de  Credit,  117,  118; 
piivate  banks  an.l  the  moratorium,  126. 


Production:  effects  of  the  war,  3-."i;  private 
enterprise.  .*>7,  r>8;  socialistic  system,  .'»7- 
."S;  price-hxing,  ,'iS,  O'J;  measures  used 
to  meet  economic  situation,  ,''»',*-(>0;  con- 
trast between  Germany  and  I'rance  in 
substitution  of  public  for  private  con- 
trol. Ot*-01:  luxuries.  01-02;  false  busi- 
ness philosophy,  l-'raiice,  02.  ti.'t;  Lyons' 
fair  for  exhibition  of  new  products,  tJO; 
cereils  in  Irancc.  with  table.  70,  77; 
meat.  70;  coal,  77;  cause  of  increased 
prices,  l.-iii.  l',t*i-108;  expansion  in 
L'nitcd   States,   table,    li'iO. 

Public  debts:  I'rance  as  compared  with 
England  and  Germany,  43;  of  warring 
states,  l,"i;  war  debt,  I'rance,  !(i2-104; 
methods  to  reduce,  lOH;  debt  ol  Prance 
set   olT    by    hjans   to    Allies,    13t>. 

I'uliue  hii.ince;  I'nited  States  methods  of 
rinancing  the  war,  11;  obtaining  funds 
for  war  expenditures  of  governments,  10; 
financing  tie  war,  Gre.it  llritain,  11; 
Krencli  hscal  methods,  '.13-104;  issue  of 
paper  money,  !t3;  doctnne  that  war  ex- 
penses should  be  met  by  taxation.  113, 
114,  !l,1.  18:t;  i.rotectiug  Kussiaii  ..bliga- 
tions,  100;  boils  de  la  defense  nationalc, 
08;  long  time  loans,  00-101;  Rogart's 
tables  giving  elements  of  war  financial 
history,  1112;  I'rancc's  war  debt.  11)3-104; 
problem  of  I'rance  in  making  foreign 
payments,  13,-i;  expenditures  of  the 
L'nitcd  Stat.,  for  1017,  170;  appropria- 
tions for  I',il8-l;i1!l,  ISO;  loans  to  Allies, 
180;  revenues  for  fiscal  years  lltUI-lOlS, 
1><0.  IHl;  policy  of  loans  and  expansion 
of  liank  credit  for  financing  viar.  176, 
177,  180-10,'i;  libertv  loan  nrd  «ar 
savings  stamps,  1«1-1S2;  short  term 
Treasury  certihcntes.  182,  183,  ex|ian- 
sion  of  bank  credit.  ls,'!-l',l,".,  p.ihcy 
com|iarcd  to  Civil  War  practice,  18:t"; 
effect  u|ion  prices.  1K4;  loan  policy  as 
affecting  bank  expansion,  18.-i.lxO;  as 
affecting  member  hanks  of  federal  re- 
serve system.  180-lMO;  charts.  IS",  18.S; 
control  of  credit,  IHtt,  101;  creation  of 
Capital  Issues  Committee  and  War 
Finance  Corporation,  101-104;  subcom- 
mitt  I-  on  moiiry  rate*  of  New  York 
Libiilv    Loan    Committee.    IIH,    UIO. 

Rediscounting:  by  central  b.inks,  (icrmany, 
hngiani  and  Irancc,  0;  acceptances,  ;i2; 
used  to  cxaggeratid  degree  bv  r'riuch 
banks,  .-,4,  Han. pie  <le  l'r,vice.  .'>4.  Ill; 
federal    reserve    banks.    |0,">.|tlO,    171. 

Rcichsbank:  Spandau  treasure  in  vault,  fl, 
210;  note  issue.  <>.  10.  vih.r  reltased. 
."sS;  gold  in  v.Tiilt  since  ..iitbre?!.  of  the 
war,    chart,    21  s 

Rente,"    long    tune    loan    of    c'rench    gov- 
ernment.   00  101. 

"  Reprise   des   affaires,"    .'itl  70 

Ribot.  .Mexandre  I'.,  (12,  Id','  12.'t  12.'i 
130, 

Rovensky,   .lohn    K,    1."i8 

Russiri:  national  lunks.  efioits  to  iiurease 
g'lM  reserve,  0.  10,  Uussian  obligations 
lir.ili.te.l  in  Great  Mritain  and  Irioue, 
loo.  i;iL'.  prices,  2.i:>,  21o,  st;,tcment 
of  situation  by  Kdmond  Thriy.  131; 
rapid    economic    development*.    I.'il, 

Savings,    l-"ren,h.   invesied  abroad.    311. 
Savings   banks,    protected    from    insolvencx, 


226 


IXDEX 


rr.mii\  lir.Mt  Britniii  ,inH  I'nitfil  States. 
14;  I'uiula  ilt'iioMttii  witli  central  >tatc 
instilutinii,  rraiKt,  L'li;  Krci\ch.  a  proh- 
IcTii  at  outbreak  of  war.  llS;  deposits 
anil  withdrawals,  fiKurcs  of  Caissc  des 
Depots  >t  ti)n>i(!:.jlRms.  H'.lIL'cl; 
policy  of  invcstiiuiu  criticized.  1L*0;  law 
increasing  maximum  deposits.  IlMi;  re- 
semblance of  Credit   h'nncicr  to,  1-0-121. 

Scbneider-Crcusot  munitions  firm,  loan 
negotiated    for,    1"7. 

Securities;  etTi'rts  t(t  convert  to  cash,  ,",  tl, 
I'J.  4tl,  147;  collapse  of  values,  8;  v.-.lues 
reckoned  at  closing  price  on  stock  ex- 
change, t>;  bought  bv  American  hanks, 
.rt;  hr,n,lied  by  l-'rencb  banks,  3.1.  IHT; 
French  banks  investing  agencies  fur  de- 
positors. ;*.".  .'i7-;ts.  4*1;  commissions  on 
sales.  .'(";  effect  of  outbreak  of  war  on 
leading,  table.  48;  decline  in  foreign, 
cause  losses  to  I'rench  people.  IIH;  bank 
loans  involveil  on  stock  exchange,  lli^; 
decline  of  the  "rente."  124;  foreign 
govvrnmcnt  bonds  dealt  in  by  Iranee. 
127;  ordinarily  share  functions  ,,t 
money.  Hfi;  charts,  representative  stocks 
on  I'aris  bourse.  12X;  government  bonds. 
121*.  charts  discussed.  I.'12;  Russian  gov- 
ernment hoiirls,  l;tO;  protected  by  Creat 
Hritam.  I'M;  .\merican  railway,  in 
French  bourse.  l.'Kl;  decline  of  foreign 
investments  in.  144;  sale  of  .New  York, 
by  Kuropean  investors.  147;  foreign  gov- 
ernment, in  the  hands  of  .\merican  in- 
vestors, table,  l.'di;  course  of  prices,  205- 
Mt'. 

-•shipping,   revival   of   French.  ti4.   <i!t. 

Sil\er  large  \olutm'  in  circulati.m  in 
I'ra.ice.  .S2.  hoarded  by  the  (leople. 
•'"4.  s,", ;  reasons  for  boanling.  Mi; 
serve  r.leased  by  ltan<|ue  dc  1  ranee.  «.'!; 
depreciated  as  nionev,  .'<4 ;  taken  out  of 
circulation,  I'nited  Statts.  rlurini;  (.  ivil 
Uar.  S4:  ho»  value  as  monev  is  main- 
tained 111  I'rance.  ^7;  not  re.leemahle  bv 
law  ill  gold.  H7;  rise  in  (irice  Ui2': 
causes.  Iti.'t;  shippeil  in  selllmg  foieign 
balances.  Kl.'t;  silver  certificates  and 
dollars  retired  by  Congress.  Hi:i ;  Treas- 
ury fund  exi.'.rlcd  to  India,  .tr..  lti;i: 
exr:haii«e  rates  in  Xi «  V.irk  on  countries 
using  silver  standard,  l.ond.m  price  of 
sil%,r.    table,    lti2. 

Sociit.  CeneraK:  gre.it  rrr,lit  house.  2.'i ; 
moral  •num.  11."..  changes  m  assets  and 
liabilities,  riKl-llHH.  table,  lilt,  hard 
hit  by  runs.  44:  aeeoiints  examined  bv 
llan.iue   ile    I  ranee,    44. 

Sfiragur,  ().   M.   \\,.   1411,   i.-ii     ],s;( 

.'>rii.'i.t/,    7.-I. 

Stock  exchange,  etTort  to  convert  <|uoted 
"cunties  into  cash.  .I.  (I.  12.  4tl.  147; 
elTect  of  »ar  on  \ienna.  11,  4li,  closed' 
47;  i.anics.  »l.  7.  12:  averted  bv  credit 
extension  of  hanks.  .'■,2:  t.ondon  policy. 
'•'^■.  ,\nurican  and  I'rrnrh  policies  com- 
pared, S.T:  hank'  iirotecte.l  hv  closing  of 
excbanOTs,  S!<:   New  York  exchange    12 

loo""'--  ^'""■'''  ""■'■  '■•"•  ■■••"  '■■'''''■■ 
Mi":    relation    of    prices    f,i    seruritirs   on 

French  bnurse.  1.1;  we.aVnrss  r,f  wcuri 
ties.  4.r4,-,,  40,  122;  rurb  market  and 
official  hoursr  closed.  47:  closing  in  vari- 
ous countries,  47;  Paris  figures  showing 
effect  of  w,ir  on  leading  securiliet,  4»; 
I,/an«  involved  in  bourse  settlement,  122, 


8;t, 

re- 


124:  contrast  in  m.thod.s  of  settlement, 
I'ari5.  I, oil. Ion  and  -New  York,  122-123; 
l'ar.|uct,  I'aris  official  exchange,  122! 
124;  platis  for  relief  of,  12,'i;  nature  of 
securities  and  reason  for  collapse,  127; 
jTices  on  I'aris  bourse,  representative 
stocks,  l!)14-l!tlH,  chart,  12S,  govern- 
ment bonds.  1!)14-1!>1,S,  chart,  12!);  dis- 
cussion of  charts,  127,  l.'to.  i;t2;  .Ameri- 
can railway  securities  in  French  bourse, 
l.'tti;  share  sales  from  lHOfi-ldH,  148- 
147,  sale  of  securities  from  Kuropean 
investors,  147;  decline  in  prices  ami  gen- 
eral averages,  147,  148;  railroad,  l.tfi, 
14,S;  industrial,  148;  selling  by  investors 
and  loreigners,  I4,><;  London  values,  2i:t; 
commoditv  and  slock  prices  compared', 
-0,1;  chart,  2I»>;  jirices  during  war.  20,"i- 
210:  chart.  2II7;  railroad.  208.  20!l.  210- 
industrial,  20H.  20!l;  bonds,  210,  Si:e 
also  London  stock  exchange;  .\ew  York 
exchange. 

Tablesj  ,\ctif  du  Credit  Lyoimais,  Dec,  ;tl. 
l!»0,'i,  20,  23;  prices  of  commodities  iii 
lrance_hy  quarters.  101  l-liU.I,  7:|;  I'loi. 
1018,  7.">;  rise  of  prices  from  middle  of 
1014  to  middle  of  1010.  SO;  total  bor- 
rowings. .\ug,  1.  I014-I)ec.  .•tl.  1017, 
102;  receipts  and  expenditures  of  France 
Aug.  I,  1014-Kcc.  .•';,  1017,  102- 
Sflected  items  from  balance  sheets  of 
t)ani|ue  dc  France,  i014-1018,  li;<; 
Paris,  elTect  of  outbreak  of  the  war  oft 
certain  leading  securities,  48;  compari- 
son I'rcnch  railway  gross  receipt^  1013 
1014.  lom.  1017,  07;  decline  in  mora- 
torium and  gain  in  new  hills  llamiuc  de 
r  ranee,  Il7-fi8:  prices  of  commodities  by 
•luartcrs.  1011-101,'-..  France,  7,1;  assets 
and  liabilities,  Cre.lit  Lvoniiai-,  1014- 
1018.  11.-,;  of  Comptoir  d'Kscoraple 
inl''i''o'*''  '"■':  °'  Swiite  C.encrale. 
,'■','.■,'•'""*•  '"'■.  changes  in  assets  and 
liabilities.  lOl.t-1017,  117;  percenlage 
table,  Russian  commodities.  131;  decline 
in  share  sales  New  York  -tock  exchange, 
1000-1014,  14li;  stock  collateral  loans 
of  national  banks.  1010-1014.  147;  sales 
of  .New  Yojk  securities  by  Kuropean  in- 
vestors, 147;  failures  in  I'niled  States 
10011-1017,  l,-.2;  ..roduction  in  I'mt.d 
States,  1010-1!I18.  1.-.ti:  inciea-e  m  in 
come  of  people  of  Cnited  Stat.s.  l.'.i). 
ratio  of  foreign  and  domestic  trade.  1''7' 
tiel  foreign  trade  balances  and  imtiiod 
of  'inancing  since  Iiilv  1.  1014.  l.'.H; 
credits  extended  hv  rniteil  States,  to' 
.Se|it.  211.  1018.  |,"0;  foreign  government 
securities  m  hands  of  .\merican  investors, 
I'O.  principal  resource  and  liability 
reserve  system  on  selected  dates, 
Hli^      exiiendilures      .if     Cniu-l     St   I.  s 

1017,  170;  oh|ects  of  expenditures.   101,V 

1018,  170;  loans  made  bv  I'nite.l  States 
to  its  allies  to  Sept.  211.  101s.  Ixii- 
revenufs  of  Tnitrd  .Stales.  101,-.. 1018,' 
1*0;  resources  of  hanks.  I'nited  States, 
1014. 1018.  IM:  wh.desale  prices  j,,  tli« 
r.Mird  States  and  ceitain  foreign  conn. 
tries.  100;  I,ondnn  stick  .xebange  values, 
213:  price«  on  Rn'tish  war  loins,  214. 

Tsxation-  fear  of,  cause  of  deprtssion  in 
Iranee.  44:  doctrine  that  war  expendi- 
tures shoi.M  he  met  bv.  03.  04;  of  <ecurl- 
tics  and  income.   France.  47;  in  France 


INDEX 


227 


96-08;  for  meeting  payment  on  war  debt, 

104. 
Temps.   U\   lOtd. 
Thery,    tdinond,    81»,    131. 
Thomas,    Allwrt.    *»0. 
Trade — see   Foreign    trade. 
Treasury    certiticatcs    ol    indebtedness,    11* 

171,  182.   183.   I8'J. 
Treasury    notes    France,    SO. 
Trust    companies,    response    to     President's 

appeal    to    join    tederai     reserve    system, 

177. 

Union  Parisiennc.  137. 

Onitcd  States.  iiKtliOus  ut  financing  the 
war,  11;  banks  called  on  tor  Treasury 
bills  and  certificates,  1 1  :  Rovernment 
guaranty  >>!  railroad  cretlit,  14 ;  prepara- 
tion for  industrial  readjustment,   15;  per- 


centage of  .payments  made  by  check,  29; 
clieck  production  and  importation  ot  luxu* 
ries,  (n-O'-i;  New  York  at  outbreak  ot  the 
war,  143-1&2 ;  gold,  foreign  trade  and 
foreign  exchange,  153-104;  tederai  re- 
serve  system,  165-178;  public  hnance 
and  bank  credit,  170-195;  prices,  100* 
;flO;  commodities  and  securities,  1^95*210. 

Vidal.    M.,    130 

War    Finance  Corporation,    17'J.   101-194. 
War  loans,  prices  ut   ilritish,  table.  214. 
War  savings  stamps  and  thrift  stamps,   182. 
War  timi.  cxiKnditurc,  rr.cthudu  ct  obtnir.ir.s 

tunds   tor.    lt», 
Wtalth,  preference  Mr  liquid  form  evidence 

ol  demoralization  ut  credit.  7. 
World  war,  methods  ot  hnancing,  10-11. 


MMIED  IN  U.Ui 


